The US Dollar declines on the back of the mid-term election results that saw the Democrats retake control of the House making life difficult for Donald Trump. The Euro and the Pound benefit from this turn of events with both currencies trending higher. Equities don't seem to mind the results too much with the European and US futures pointing towards slight gains while commodities fail to take advantage of Dollar's initial weakness.
The greenback whipsawed overnight as the initial results started coming in but this morning the US currency seems to settle lower. So does this signal a material change of bias for the Dollar and should we expect more losses? Well, no and yes. In terms of the elections' result, Donald Trump will definitely have a tougher time getting his legislative initiatives through Congress but this shouldn't be a dampening factor for the Dollar itself in the long term. However, there's one more potential risk for the US currency this week and this is no other than the Fed interest rate decision and the statement that will accompany it.
We know that the Fed will not alter their policy at this time and last week's robust NFP data almost guarantees that they will raise interest rates again in December, which is a boon for the Dollar. However, this month's statement may have to acknowledge the recent deterioration in domestic data and, should this happen, it may dampen expectations regarding the Fed's tightening schedule for 2019, which may hurt the Dollar. Currently investors are expecting between 2 or 3 rate increases next year but depending on the Fed's remarks these expectations may tilt lower. As such, the worst may not be over for the greenback bulls just yet this week. Dollar/Yen is hovering just above the 113 mark and a bearish wave may force prices towards the 112.50 and 112 figures over the course of the next few days.
The Euro will also attract our attention today in light of fresh data from the Euro area. Yesterday the downbeat figures from France and Italy were offset by better than expected numbers from Germany and the Eurozone but today the focus will be on the Euro area retail sales data. Expectations are set for an uptick in consumer spending during last month and this may provide a boost to the shared currency, driving it towards and potentially above the 1.15 mark.
Gold hasn't been able to benefit from Dollar's weakness yet with prices declining yesterday. Still the yellow metal is about to test an ascending trendline on the 4-hour charts which may provide fresh support and help Gold travel higher again; however, $1,240 is the barrier we need to overcome before we can discuss a fresh medium-term rally to the upside. Oil is still suffering from the news regarding the waivers issued on Iranian oil imports and prices are now trading below $62; technical studies suggest that we may have to wait until the $59-60 area for meaningful support to re-emerge.
Equity futures are trending marginally higher this morning reflecting investors' view that the mid-terms' result was pretty much expected and potentially already priced in. As we discussed above, the change in power in the House will make President Trump's life a bit harder but it seems that market participants are focusing on the more important issues that will have a longer-lasting effect on stocks, namely the US-China trade war and Fed's tightening cycle. As such, we should turn our attention to any fresh developments on these two fronts that will provide equities with the necessary boost and direction.
MARKET EVENTS TO WATCH
- Euro-Zone Retail Sales - 2pm
- U.S. Crude Oil Inventories - 7.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research