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How the US election could impact the FTSE 100?

With the US presidential and Senate elections coming up on Tuesday 3 November, we take a look at how each of the potential outcomes could impact the FTSE 100.

US Election Source: Bloomberg

We are just days away from finding out whether Donald Trump or Joe Biden will win the 2020 US presidential election, with UK stocks more closely tied to the stability of the US economy than ever as Britain prepares to leave the European Union at the end of the year.

Since hitting a year-low and breaking below 5000 points in mid-March, the FTSE 100 rebounded to 6484 in the first week of June driven by major government stimulus packages in Europe and in the US.

However, the blue-chip index has slowly trended lower ever since, sliding more than 5% in October alone, with the American politicians proving unwilling and unable to approve further economic stimulus that the country desperately needs until after the election.

But how will the outcome of the US election impact the FTSE 100? IG takes a look at how the index has performed in the lead up to, and how it may perform in the wake of the election result.

FTSE 100: technical analysis

The FTSE 100 is starting to regain ground after a period of downside which has seen the index fall into a six-month low yesterday, according to Josh Mahony, senior market analyst at IG.

‘The trend of lower highs and lows remains in place, yet the rise we are currently seeing points towards a potential retracement coming into play,’ Mahony said. ‘However, the question is just how much of a retracement we will see from here.’

‘As such, there is a chance we could see further short-term upside, yet until we see a rise through the 5886 it looks likely that we are seeing a temporary rise before we turn lower once more,’ he added.

FTSE 100 Chart
FTSE 100 Chart

How the US election will impact British exporters and GBP/USD

The Trump administration has ensured that no US stimulus relief to offset the economic fallout from the Covid-19 pandemic will be approved until after the election result, helping to send the Dow Jones and S&P 500 sliding 6% over the last seven days.

Based on the polls, the most likely scenario on Tuesday will see Biden elected as president and democrats narrowly secure the US senate. If this plays out, the Democrats will have full control over Capitol Hill and will likely use that power to push through a large stimulus programme.

If the above scenario, the US dollar will weaken significantly helping to make exports more attractive, while also facilitating an effective economic recovery. However, it will also prompt FX investors to shift capital away to other currencies like the euro and sterling, weighing down FTSE 100 exporters due to the stronger pound making products and services more expensive. A similar outcome would play out if Trump is able to clinch the election the Republican party will likely secure the senate too leading to a swift approval of additional economic stimulus.

However, if Biden wins next week but the Republicans retain control of the senate then the prospect of political paralysis is high and the likelihood of a fresh stimulus package being approved is severely diminished. This would in turn lead to a potential shoring up of the US dollar and would see sterling fall in value, while making FTSE 100 exports cheaper and more appealing.

GBP/USD: technical analysis

For GBP/USD, a drop below trendline support from the September low found buyers yesterday, and while the price has continued to fall and establish another lower high so far today a bounce seems to be in the offing, according to Chris Beauchamp, chief market analyst at IG.

‘This more bullish view would target last week’s peak towards $1.315, while a reversal below $1.293 could help give the sellers further ammunition,’ Beauchamp added.


FTSE 100: after-hours trading with IG Bank

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