US Dollar: Midterms pose limited downside – ING

ING strategists argue that the US Dollar’s reaction to the midterm elections should be short-lived. They see some short-term downside risk if Democrats win both chambers, mainly via regulation concerns and gridlock fears, but stress that the Federal Reserve narrative remains dominant. A split Congress is expected to be neutral to slightly supportive for the Dollar.

Midterm scenarios and Dollar risks

"We don’t expect today’s US midterm results to cause structural shifts in FX, but the dollar may face some short-term pressure should the Democrats secure both the House (widely expected) and the Senate (close call)."

"Our baseline assumption is that markets fully price in a Republican loss of the House, but only partially a Democratic clean sweep. A blue sweep can put some pressure on the dollar. Fears of tougher regulation could weigh on AI stocks (we’ve recently seen how that can hit the greenback), while markets could price in greater risks of decision-making gridlock around issues such as government funding and the debt ceiling."

"Still, we doubt that’s enough to trigger a structural directional shift in the dollar. The greenback continues to respond predominantly to the Fed story, which shouldn’t face an immediate and direct impact from the midterm result. We expect a split Congress (R-S, D-H) to have a neutral or slightly positive USD impact."

"Hopes of a revamp in diplomatic efforts have sent Brent tumbling back below $105/bl, while the dollar has softened slightly alongside commodity currencies. On the macro side, today’s calendar includes US JOLTS job openings."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)