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The U.S. midterm elections are almost here. The results on November 8th will heavily shape Biden’s ability to roll out policies in the second half of his term. And there will be lots of development to pump up the election.

One of the major areas of focus will be the scorching inflation. It has to be brought down and while doing so, there will be major events that can move the markets in a big way. 

So, let’s understand how we can position ourselves to target some potential profits in this election led market shift.

Fed Monetary Policy & Inflation

An important thing to focus on is the Federal Reserve’s monetary policy decisions and inflation.

The FED again raised rates by 75 basis points this week. This is the fourth consecutive 75 bps hike by the central bank and it has brought the midnight Federal Funds rate to the range of 3.75% to 4%. 

In fact, the Fed also delivered a sharp tone in favor of over-tightening in the policy rather than under-tightening in a bid to cool down the inflation – a major market move potential. 

The narrative was the same last month where officials said they will continue to act aggressively to cool the economy and avoid a repeat of the early 1980s – the last time when U.S. inflation got out of control.

How can this have an impact on the currency markets? And where can we expect the dollar to move?

Impact on the Forex Market

You see, the economy doesn’t look in a good shape currently.

Rising prices are hurting wallets, there are fears of a recession, and add to that the rising oil prices – all of it is concerning for the government and the Fed as the election season nears.

You see, before elections, every politician would want inflation to be low, so they get a clean bill of health and a clean chit from voters about a good job that they’re doing.

And that’s what President Joe Biden and the U.S. Federal Reserve will more likely attempt to do.

They will want to keep the dollar up so that they can manage inflation without raising rates and so they can basically manage their external debt as well.

Remember, the U.S. is one of the world’s largest debtor nations. 

Now, the way you can manage, or at least partly manage your debts, is to make your local currency so strong that you have to spend very few dollars to repay the nation you owe money to in their currency.

The U.S. also imports a lot of stuff. And if the dollar is strong, the landed price of important goods in America remains low, which can subdue inflation.

So, we believe we can expect a strengthening dollar in the coming days.

On the other hand, we can also likely expect a further fall in the Japanese yen. Note that Japan has been intervening in the FX markets more so than it has in the past. It is buying yen for the first time since 1998 in an attempt to shore up the battered currency. Moreover, it is not looking to back off on a low interest rate regime anytime soon.

Trading USD Setups

With a strong dollar and weakening yen, one of the trade strategies can be to look out for some USDJPY setups to potentially target profit from the major shifts in the FX markets in the election season.

Another strategy could be to track the trading of USD major pairings in the run up to the 2014 midterm elections and the 2012 presidential elections to examine how different USD pairs can behave in different election environments.

Our top analysts have been reading these setups and their charts seem to be forming an exciting pattern in the current market.

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