US presidential candidates Kamala Harris and Donald Trump will face off in a closely watched election in November, with global investors anticipating significant market impacts including in global currency markets.
Fawad Razaqzada, market analyst at City Index, has outlined three potential scenarios that could influence movements in the EUR/USD exchange rate, one of the most traded currency pairs, based on the election results.
Each scenario revolves around different combinations of presidential and congressional control, with varying impacts on fiscal policy, inflation and trade. These factors could drive the US dollar and euro in opposing directions.
Scenario 1: Trump clean sweep victory
If Trump wins the presidency and Republicans take control of both the House and Senate, it could lead to significant fiscal changes. “This is potentially the most bearish scenario for the EUR/USD forecast,” Razaqzada said.
Trump has promised immediate tax cuts and stricter immigration controls, which could be rapidly implemented under unified Republican control. These measures are likely to stimulate economic activity but also drive inflation higher, as looser fiscal policy tends to fuel demand and upward pressure on prices.
In this scenario, the US economy could see a boost in growth, but inflation risks would increase. Tax cuts would inject more money into the economy, while stricter immigration controls could limit the supply of labour, pushing wages higher. These factors would likely increase bond yields, which in turn could support the US dollar.
“In short, inflation could be higher in a Republican clean sweep amid looser fiscal policy,” said Razaqzada.
The potential for trade tariffs under a Trump administration could further impact the EUR/USD exchange rate.
Trump may reintroduce tariffs on eurozone imports, weakening European exports and placing additional downward pressure on the euro. Tariffs could also increase import costs in the US, contributing to domestic inflation, which would further support the dollar.
Scenario 2: Trump wins, Democrats control the senate
In this scenario, Trump wins the presidency but Republicans only manage to take control of the House, while Democrats hold the Senate. This would lead to a split Congress, limiting Trump's ability to push through his legislative agenda.
Major policy initiatives, such as tax cuts and stricter immigration controls, would likely face significant opposition from the Democrat-controlled Senate, resulting in legislative gridlock. With fewer fiscal policies enacted, the economic impact would be more muted compared to a full Republican sweep.
While tax cuts and immigration reforms might be scaled back, Trump’s administration could still introduce some inflationary policies, particularly through trade measures and foreign policy. Inflation would likely rise, though not as significantly as under a clean sweep, which would still provide some support for bond yields and the US dollar.
In terms of the EUR/USD exchange rate, the US dollar could strengthen, but the effects may be less pronounced.
“Trump and the Republicans’ hands will be tied,” Razaqzada explained, noting that Democrats would force compromises on key policies. The moderate inflationary pressures would likely support the dollar, though to a lesser extent than in a Trump clean sweep, leading to a smaller decline in the EUR/USD rate.
Scenario 3: Harris wins the presidency
If Harris wins the presidency with a split Congress - Democrats controlling the Senate and Republicans controlling the House - market dynamics would shift differently compared to a Trump-led outcome.
By mid-September, opinion polls showed Harris as a slight favourite to win the presidential race. However, Republicans were still expected to retain their majority in the House, leading to a divided government and limiting Harris’s ability to pass major legislation.
Under a Harris presidency, fiscal policy would be more restrained compared to a Trump administration. Fewer tax cuts and a more cautious approach to government spending would likely define her economic strategy. While this could help contain inflation, it may also slow economic growth.
“A Kamala Harris win will mean less tax cuts and more rises from 2026,” Razaqzada noted, suggesting that fiscal policies would aim for long-term stability rather than immediate stimulus.
In terms of the EUR/USD exchange rate, a Harris victory could contribute to a bearish trend for the US dollar. If inflation continues to decrease and the Federal Reserve signals further interest rate cuts, the dollar could weaken further.
Meanwhile, a more stable trade environment would ease some of the pressure on the euro. Harris is less likely to introduce the kinds of tariffs Trump has imposed, especially on eurozone imports, making the trade backdrop more predictable.