Euro holds gains as US Dollar weakens following midterm elections

• EUR/USD holds gains as Democrats’ congressional victory sparks US Dollar selling.
• Resilient US employment and services data helps the Greenback recover some ground.
• Markets expect both the Fed and ECB to raise interest rates in December.

EUR/USD trades on the front foot on Wednesday, supported by broad US Dollar (USD) weakness following the US midterm election results. However, the pair eases from an intraday high of 1.1273 as resilient US economic data helps the Greenback regain some ground. At the time of writing, EUR/USD trades around 1.1235, up 0.35% on the day.

Democrats have seized control of both houses of Congress, raising the risk of political gridlock in Washington and triggering heavy selling pressure on the US Dollar. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 101.45, down 0.40% on the day. The index has recovered from an intraday low of 101.21, its weakest level since September 30.

Meanwhile, Oil prices fall sharply as traders speculate that a Democratic-controlled Congress could restrict funding for Trump’s military campaign against Iran and increase pressure to end the conflict. West Texas Intermediate (WTI) trades around $87 a barrel, down 9% on the day.

Cheaper Oil could offer some relief to the Eurozone economy by lowering energy import costs while also easing inflation pressures globally. However, the lack of a clear path to a negotiated end to the conflict keeps uncertainty alive and leaves Oil prices vulnerable to sharp swings.

On the data front, the ADP report showed private-sector employment increased by 86K in October, beating expectations of 69K, while September’s gain was revised down to 86K from 90K. The ISM Services Purchasing Managers Index (PMI) eased to 54.5 from 54.9, slightly below the 54.8 forecast but still indicating expansion.

The data leaves room for the Federal Reserve (Fed) to maintain its hawkish stance as policymakers work to bring inflation back to the central bank’s 2% target. Markets are pricing in an 80% chance of another rate hike in December, according to the CME FedWatch Tool. Attention now turns to weekly US Initial Jobless Claims on Thursday and Nonfarm Payrolls (NFP) on Friday.

In the Eurozone, preliminary October inflation data released earlier in the day keeps a December rate hike by the European Central Bank (ECB) in play. Headline inflation rose to 4.0% YoY from 3.8%, while core inflation held at 2.5%, leaving both measures above the ECB’s 2% target.

ECB policymaker Klaas Knot warned on Tuesday that “core inflation, second-round effects will likely pick up,” adding that the central bank “may have to approach [the] 2% goal more often from above.”