The Dollar takes center stage for yet another day today in light of the US mid-term elections that may provide an unpleasant shock to the US currency. At the same time, risk appetite continues to improve with most high beta currencies trending higher versus their safe haven counterparties. The Pound captured 1.3050 overnight on rumors that a Brexit deal is 95% done while equities are pointing higher ahead of the London opening bell.
The US mid-term elections is the event of week and for a good reason: with the most recent polls indicating that the race for the House is too close to call the Dollar is exposed to a potential risk today. If the Democrats succeed in taking over control of the House then a split Congress will not be a helpful outcome for Trump - and the Dollar in extension. The US President will have a hard timing passing the kind of legislation he wants to - in order to implement his fiscal policies - and this is regarded as Dollar bearish from the market. As such, depending on the elections' result today we may see a pullback for the greenback.
In the opposite case that the Republicans manage to retain control of both the House and the Senate the Dollar should be in for a relief rally. The US currency has been trading with a positive bias going into the elections so the rally in case of a Republican win will not be extreme but in any case the US currency will remain on an upwards trajectory in the short term. After the elections are behind us, investors will want to focus on the Fed interest rate decision and its accompanying statement. The interesting question is whether the Fed, even though they remain on course to raise rates in December, will be forced to acknowledge the recent downtick in domestic performance and how will this play into investors' positioning towards the end of the year.
Elsewhere, the Pound holds on its gains even though the Services PMI data printed lower this month. Speculation that a Brexit agreement is almost done is keeping the UK currency well supported and should this deal be announced soon the Pound will rally further - with 1.35 a potential medium-term target. In the short term though, Cable's price action will hinge on the Dollar and the outcome of the US elections today: a Dollar positive result may threaten the 1.2950 support level while a win for the Democrats could drive prices towards the 1.32 mark.
Gold seems to be bottoming out in the short term after spending the past couple of days trading sideways around the $1.230 area. With limited geopolitical risks on the horizon, the yellow metal's price action will be mainly driven by the Dollar and its reaction to the mid-terms. The support lies around the $1,215 level while a break higher will clear the path towards the $1,240 figure. Oil had a slight reaction to the upside yesterday which didn't last long; with prices trading below $63 we may see a deeper correction lower in the following days.
Most stock markets ended the day in positive territory yesterday with investors' sentiment improving on hopes that the US and China will find some common ground soon and that the mid-term elections' outcome will not disrupt domestic performance. This morning futures on either side of the pond are trending marginally higher indicating that traders believe that any potential surprise in the mid-terms, should it happen, would only be a short-lived disruption. Over in Europe though, the confrontation between Italy and the EU on the former's budget draft continues so any news on that front may drag the European markets lower during the course of the day.
MARKET EVENTS TO WATCH
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research