FX market braces for US midterm election results

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6 November 2018

thomasdodds

The EUR/USD rate was relatively range bound on Monday, with investors in a cautious mood ahead of today’s US congressional election.

W
hile historically not a big mover in the FX markets, the outcome of today’s midterm elections could take on considerably more significance on this occasion, given its sway as to whether or not we’re likely to see additional fiscal stimulus from Donald Trump during the remainder of his presidency. Trump promised a fresh round of tax cuts to the middle-class following this week’s midterms, although he will find this very difficult to do, should his Republican Party lose control of the US House of Representatives, as recent opinion polls are suggesting.

All 435 seats in the House and 35 of the 100 seats in the US Senate will be contested, the two legislative chambers that make up Congress. The polls leading up to the elections have been relatively close. Political prediction website PredictIt are, however, currently placing around a 70% chance that the Democrats will triumph in the House vote and as high as a 90% chance that the Republicans retain control of the Senate.

In the event that Trump loses control of the Senate we would expect a sell-off in the US Dollar, as the chances of further tax cuts are lessened. Conversely, a Republican clean sweep would likely lift the greenback higher.

News of potential Brexit breakthrough buoys Sterling

Away from the US, the Pound remained well supported yesterday by last week’s report that suggested an agreement on Brexit, one which would include an all-UK customs arrangement, was close.

The report over the weekend from The Times, should it prove to be the case, would ensure that a Northern Irish ‘backstop’ would not be required. This raised hopes that a solution over the Irish border impasse, which many feared could be the ultimate undoing of any deal, may be found in time for the next summit of European Union leaders in December. There was even renewed talk of a November EU summit being called, having allegedly been ‘scrapped’ due to lack of progress following the October meeting.

Earlier in the session, the latest UK services PMI suggested that sentiment among business was low in October amid the ongoing Brexit uncertainty. The crucial index sank to a seven month low, 52.2, well below consensus. With focus firmly on Brexit this was, however, largely overlooked by currency traders.