The Effect of US Presidents on EUR/USD Movement

Whatever asset you decide to trade, the first lesson your mentor will teach you is to ‘look at the EURO DOLLAR long term trend’. Traders persistently try to predict the EUR/USD long term movements, ending up into circles.

The frequent question being asked by all financial data providers at the start of every year – what will be the direction of Euro Dollar in 2015, 16, 17, …? The usual answers will be like ‘we expect bearish pair because the FED is more likely to raise the interest rates’ or ‘bullish because the TROIKA decided to bailout Greece’! This possibly would be part of the game. However, I have been wondering about the real reasons behind this major pair, comparing it with US and EU stocks ending up with no direct correlation result. This article will unfold the most important fundamental factors behind EUR/USD movements and its correlation to the US stock markets.

U.S. Elections Influence

USA is a row model for the institutional democratic regime. Parties not persons are the main players on the political theater. Accordingly, party policy is dominating candidates’ planes. Ronald Reagan, George H Bush, George W. Bush and Donald Trump, are all players for the same team trying to reach the same goal. On the other hand Jimmy Carter, William J Clinton, Barak Obama are also applying their party’s economic and political unique agenda.

Without getting so deep in politics, the US ruling party casts strong influence on the EUR/USD pair. That influence reflects the strong correlation between the party’s political agenda and the USD price. Overlooking the political and social aspects, every team has an opposite economic agenda. In general Republicans tend to focus inwards as they focus on taxes levels, revising agreements entered into with other countries, increasing military spending. Democrats tend to focus on external expansion, decreasing military spending. Some of these policies depends on governmental spending to stimulate the economy, and others trying to reduce expenses in order to take control over inflation.

 

It is obvious from the chart how much the pair is influenced by the US ruling party. Start at the rising red trend lines; they are all falling during the republican periods. Meanwhile, the falling blue trend lines representing the pair price during the Democratic periods. In other words Republican fiscal policy build upon weaker dollar; while, the stronger dollar is the result of the Democrats fiscal policy.

Ronald Reagan Era

As you read this part, I want you to assimilate it carefully so that we will come back to it later. Willam Niskanen (a member in Reagan council of economic advisers 1981-85) summed up the Reagan’s economic promises in four points:

• Tax reducing personal Taxes from 70% to 28, corporate tax from 40% to 34%
• Reduction of regulations
• Reduction of governmental spending
• Decreasing inflation by controlling the money supply money supply

Inflation before Reagan inauguration reached 13% and dropped to around 2% by the end of his second period; however, applying the first two points was not enough to control inflation. By looking to the second two points, we will find out that military funding increased during his first period by 35%. The excessive increase in spending against his plans caused inflation to increase from 13 to 15% during the first year; as a result, GDP dropped dramatically as much as inflation to historical levels. Interest rates soared to 20%; accordingly, Euro currencies tumbled before the USD between 1980 – 1985.

A question would arise here, where was the underlying success for that policy? And who was the big winner? The answer will be shown as you read this article, however you should know that Reagan has achieved historical unprecedented achievement!

George H Bush – Constrained by The Past

When Alan Greenspan was appointed to be the Fed chairman In August 1987 by President Reagan, his vice president was his successor in the white house. The period of Bush didn’t hold new plans, as he came to find himself handcuffed by his predecessor’s results. George H Bush raised the slogan of “flexible freeze” on the big governmental deficit and the high expenses cutting from the GDP. The second point he was directed outwards, signing trade agreements with foreign countries, as NAFT (North American Free Trade Agreement).

EUR/USD was bullish during this period after Bush convinced Greenspan to cut the rates to stimulate the businesses [review EUR/USD, interest rate charts prior].

Bill Clinton – The Flourishing Era

“The only way for going wealthier is only by exporting” by words like these Clinton started his ruling, that was during the ratifying of NAFTA agreement in August 1993. In addition to his role in changing the GATT organization and developing it to include more countries with more up to date trading rules.

His policy was courageous and smart, ending up to results the served the American economy. His plan was to cut $500B from the budget, $225B of them from spending, and raising the rest form taxes including 1.2% special tax imposed on the wealthiest sector and increased the imposed taxed on the self employed sector from 30 to 80%. On the other hand, cutting taxes on small businesses in order to stimulate the economy.  Small business by one time reached 85% of the overall businesses.

By the end of Clinton period, USA had achieved the biggest surplus of governmental spending by 2.5% since the WWI. This was more than normal to drive the Dollar higher, not because of the speculating on the high interest rates, but based on solid land of real national income accompanied by stable inflation rate.

George W Bush – Numbers Speak for Themselves

I will not delve too much in that era because numbers are more eloquent than the words. Governmental spending increased 70% from $1789B to $2983B. The Bankruptcy Act 2005, which enforced all home buyers in mortgage to take equity out of their homes. This specific law caused the world financial crisis, followed by stripping out thousands of families their houses. Unemployment rocketed, businesses closed. The EUR/USD saw the highest historical levels by the end of his period.

Barak Obama – Fixing The Errors

Same as George H Bush, Obama’s policy was focused on getting out of the recession. Unemployment reached 10% by first year and governmental budget reached -10%. In July 2010 the DODD frank law by reforming wall street was approved. Two stimulus plans through taxes cutting first worth $787B and the second $858B. The famous TTP(transpacific trade and investment) agreement, and he ended his second period by starting trading partnership negotiations with European allies. By the end of his period, unemployment dropped to 4.7, governmental budget balanced to be -3.2 from -9.8.

EUR/USD pair tumbled during Obama’s two presidential periods, with some kind of long term volatility caused by the global financial crisis.

Trump Follows Reagan Footsteps

So far, the unfolded part for Trump’s policy plan is to invest $1B in infrastructure, and he has intentions to cut Taxes. Media had gave him a rope, according to Jeff Cox (finance editor for CNBC), corporate tax is the most important part inside Trump’s Tax plan. Cox added that trump – which happened already – reduce regulation, and of course the chew gum word creating jobs.

Timothy Speiss (tax adviser) added that, personal taxes is planed as following; personal income brackets to be reduced from 7 to 3 (12% – 25% – 33%).  Increasing the standard deduction to $15000 from $6500.

As we know Trump in the Real estate field, he didn’t forget to put deductions on mortgage loans (buying-building-improving) as part of the plan. We can bullet point them as follow:

• Tax deduction
• Reducing regulations
• Reduction of governmental spending
• Increasing military spending (as what Reagan did contradicting to his promises)

Now let’s go back to Reagan’s plan and compare it to Trump plan, it is identical. So I am expecting the same outcomes – economically- on EUR/USD, and stocks!

Trump Impact on S&P 500

Do you still remember the question about Reagan’s biggest achievement in financial history? S&P 500 made a straight rises all over the history. However, Ronald Reagan’s policies did not achieve so much to the American people; it caused the S&P 500 to soar in one presidency period more than any other president achieved in two periods of presidency.

S&P500 during Reagan’s started with 103 until the black Monday in 1987 reached 330 achieving 220% surplus (in three years only), then it retraced to 283 after the crash ending his period with 174% surplus. Followed by G H Bush, ended at 440 (51%) during one period.

During Clinton’s administration, which could be described as a best economically since WWI, S&P 500 closed at 1270 (193%) in two periods. No wonder that the S&P closed during the Bush administration after the world crisis in 740 which means -60%. Obama was lucky to receive the presidency just after the markets crash to achieve 206% in two periods; despite that, it was less than Reagan.

Analysts concluded that Trump’s tax plan would be ready before the congress on October and effective starting from 2018. Accordingly, it is obvious that trump is delaying to announce his plan officially (as Reagan) to earn some time and provide the S&P more momentum.

European Election and Other Major Events

EUR/USD chart shows an obvious effect of the European elections, BREXIT, 9/11. During the global crisis the pair wasn’t affected so much by these major events. One of the reasons is that the European Union elections effect is spread over many countries and during different times.

Trump Effect on The EUR/USD

Fundamentally, the same economic plan would give us the assumption that the pair may be bearish during the first period. However, Technically the EUR/USD price acting the same as it was during the start of George H Bush administration.

Putting it All Together

• One of the strongest factor to affect the EUR/USD over the history was the US presidency
• Trump policy follows Reagan policy
• Trump is trying to gain some momentum for the S&P, before he announces his tax policy
• EUR/USD is acting the same as when W Bush started his presidency