FxPro analysts say the Democrats' midterm gains weaken the case for the US dollar. They expect capital to shift toward Europe and Asia, which would support the euro and the yen.
The US stock market fell to five-week lows after the first results of the US midterm elections. EURUSD tested the upper boundary of the 1.11–1.125 consolidation range, according to the FxPro Analyst Team.
Why the dollar loses its edge
The count is still ongoing, but the Democrats have already secured a majority in both the Senate and the House, with results for two senators and 77 representatives yet to be announced. The analysts attribute the initial equity-market reaction more likely to the usual nervousness over a shift in the legislative majority. For the dollar, however, they call the result clearly negative in several respects.
Before the vote, the USD index reached an almost 18-month high in October on American exceptionalism. The US economy was growing faster than its peers, shares were in high demand because of artificial intelligence technology, and Treasury bonds drew buyers with higher yield than other major economies' bonds.
Policy risks for US growth
A potential deadlock over the debt ceiling carries, in the analysts' view, a risk of a government shutdown and slower US GDP growth. Tighter regulation of artificial intelligence and issues with data centres would also slow investment in AI, which they call a key component of growth. They expect greater resistance to the President's foreign policy initiatives, including tariffs.
The likelihood that lawmakers launch impeachment proceedings against Donald Trump has risen sharply to 70%, which undermines confidence in the dollar. As a result, EURUSD took off, while USDJPY lost nearly 1% within a few hours. Both pairs typically rise when equities rally strongly, though, so the recent equity rally let USDJPY recoup some losses while EURUSD kept moving toward new highs.
Energy and Treasury supply
The analysts expect Democrats to oppose Trump's plans to cut taxes and increase government spending. That would lead to lower Treasury issuance and erode the dollar's recent advantage.
Separately, they expect American dissatisfaction with the conflict in the Middle East to speed up peace negotiations. Less geopolitical risk and a recovery in regional oil exports would lower Brent prices, which would benefit the eurozone and Japan as net importers of energy commodities, and with them the euro and the yen.
Source: ActionForex
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