Currency implications of the 2024 elections

By the OFX team | 10 July 2024 | 6 minute read

A landslide victory for Labour in the UK and a cobbled-together coalition to defeat the right in France are the latest exclamation points in what is turning out to be a wild year of elections around the globe.

2024 will see more people vote in elections than ever in human history. Half of the world’s population across 64 countries (at least) will have had a chance to cast their ballot¹.

Theoretically, elections shouldn’t be a big predictor of what happens in currency markets – economic fundamentals are supposed to be the main driver. But this year, the usual rules may not apply.

Perhaps the least surprising event was the UK General Election. It was the biggest landslide against the British Conservative Party in their history.

Incoming Prime Minister, Sir Keir Starmer was expected to win and his small-target campaign that preached fiscal conservatism and a ‘steady-as-she goes’ policy outlook meant there was barely a ripple on currency markets.

Markets will be hoping for greater stability after a tumultuous era of Tory rule where the Brexit vote, the Scottish referendum on independence and the disastrous budget of Liz Truss, all sent the pound into a tailspin².

Euro swings on French elections

Instability will be the menu du jour in France after Sunday’s dramatic second round of voting saw a coalition of leftist parties – the New Popular Front – combine in an attempt to tactically prevent right-wing parties from winning votes. The coalition will take the most seats, but not enough to govern outright, leaving France in political limbo with no clear path to forming a stable government.

In trading, the euro fell early in Asian markets as a reaction to the prospect of political instability in a core eurozone nation.

It could have been very different if Marine Le Pen’s National Rally (RN) had continued its dramatic ascent a month or so ago.

In June, European parliamentary elections saw a surge in popularity for Le Pen’s anti-immigrant, trade-protectionist policies, with the party winning an unprecedented 297 out of 577 constituencies in the first round of voting.

The National Rally party had toned down the Euroscepticism of the past but nationalist ideology does not square well with a central currency and uncertainty about the euro could be a hallmark if the rhetoric from Le Pen emboldens right-wing parties in neighbouring states. Le Pen had already questioned Europe’s commitment to Ukraine and some analysts suggest that would put pressure on central and east European currencies³.

RN’s success in the European Parliamentary elections sent the euro down almost 1.5% against the US dollar in the following weeks as French President, Emmanuel Macron called a snap election to decisively test national resolve for such a rightward shift.

The euro had been climbing back up as President Macron, his Prime Minister Gabriel Attal and the left and far-left parties began negotiating an election truce that would see candidates drop out of seats to prevent vote splitting and allow a clear path to victory against RN.

That strategy has worked, with RN reduced to third place, winning just half of the expected 300 seats they had been tipped to win a week ago⁴.

While the euro is safe from RN, France faces a volatile coalition of parties with leaders who have differing priorities.

The election has thrust far-left leader Jean-Luc Melenchon into the spotlight. He has called for a major increase in public spending, a boost to the minimum wage and a cut in the retirement age, which is estimated to cost almost US$200 billion a year. That level of spending would not only balloon France’s already significant debt load but soar past debt limits imposed by the EU⁵.

Whoever ultimately takes power will have to contend with a range of competing priorities from coalition partners. That makes France even less likely to set a clear economic policy at a time when growth is an anemic 0.7%.

If big-spending leftist policies are implemented, inflation may break out again. That may not spill across to other European nations, but the European Central Bank (ECB) will have to keep a watchful eye. The ECB has moved to a rate-cutting cycle but if it had to reverse course to tame inflation, that would see the euro appreciate in value

America’s election year gets more intriguing

The radically different policies of candidates Joseph R Biden and Donald J Trump were already front and centre in the minds of currency markets. Further uncertainty has been injected into the mix following President Biden’s poor debate performance on June 28.

The US dollar jumped in real time as Trump dominated the 90-minute contest⁶. As a result, traders speculated that the former President’s preference for tariffs on China and loose fiscal policy would fuel a further bump in inflation.

Observers rationalise that Trump’s high-spending, nationalist trade policy will push up prices by limiting cheaper imports and force the Federal Reserve to keep rates higher to prevent an inflation breakout.

In 2016, when Trump was voted in, the dollar jumped 5%, declining a similar amount after he was voted out four years later⁷.

Other currencies are likely to feel the impact of a potential Trump presidency. Traders are already betting on a fall in the Chinese yuan should Trump reinstate the trade-limiting policy of his previous administration. The Mexican peso is another currency that may be hit by a ‘Make America Great Again’ mentality of onshoring production⁸. And, like Le Pen’s National Rally, Trump is an isolationist, which would mean less support for Ukraine. Under that scenario, the currencies of eastern European countries neighbouring Ukraine may come under pressure.

By contrast, a President Biden win is expected to oversee a decline in the dollar. The theory goes that with government debt already at alarming levels, a second Democratic term is unlikely to lead to significant spending increases. Even if Biden decides to step aside, the other potential candidates from the Democratic party appear to be singing from the same hymn sheet of fiscal moderation, open trade and consensus politics. In other words, it is business as usual from a currency standpoint.

Post-election outcomes and currency shifts

It’s no surprise that short-term currency shifts can follow unexpected election results, as was the case when India’s seemingly unassailable Prime Minister, Narendra Modi saw his supermajority significantly reduced on June 4. Following that result, the rupee slumped in a way not seen for a year.

In Mexico, President Claudia Sheinbaum romped into power on June 2, becoming the first woman president. Since then, the peso has gone from a well-performing currency to losing 10% in a month. President Sheinbaum’s proposed reforms to the judiciary have spooked investors⁹.

Shock electoral results should not come as a surprise, given the long economic hangover from Covid and the higher-for-longer interest rate environment as central banks battle inflation.

What this could mean for currencies

Cost of living pressures, whether from high mortgages or higher prices or both, are fueling voter anger and politicians are feeling the brunt.

With politics in such an unusual state, currency behaviour may be unpredictable, at least for now.

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