- Published 07:45
- FX
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). Elsewhere, a dovish hike by the RBA has hit AUD, but we remain optimistic on the outlook for the currency beyond the near term
USD: Some downside risk if Democrats win it all
All 435 House of Representatives seats and 35 of the 100 Senate seats are up for election today in the US. The Democrats are widely expected to comfortably take the House, where they need a net gain of just four seats. The Senate is expected to be much closer, though prediction markets still give the Democrats a 74% chance of securing it.
We discussed three election scenarios in this note a couple of weeks ago. 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.
On timing, polls close between midnight and 3.00 AM GMT. US media outlets may have already called the House for the Democrats before the London open tomorrow. The tighter Senate races may take much longer to call, possibly days, partly because of mail-in ballot counting delays and potential legal disputes. A close eye will be on seven toss-up Senate races: Alaska, Iowa, Kansas, Maine, Michigan, Nebraska, Ohio and Texas. In six of those, the seat is currently held by a Republican.
Elsewhere, oil prices have been the key drivers in FX at the start of the week. 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.
EUR: ECB speakers have stayed hawkish
EUR/USD is looking to establish support at 1.120 after a good start to the week. A Democratic sweep at the midterms today could help, but we don’t expect radical mood changes in the pair.
French spreads didn’t benefit from lower oil prices yesterday, signalling levels above 150bp are the new normal now. It therefore remains hard for the euro to shake out the lingering risk premium, and much more tangible progress is needed for oil to trade sustainably lower from here.
In the eurozone, focus will be on a number of ECB speakers today. Since last week’s meeting, we’ve heard some hawkish comments, endorsing market expectations that at least another hike is needed. Elevated energy prices suggest there is little room for a clear dovish current to emerge yet.
AUD: Dovish hike doesn't hit Aussie dollar's medium term outlook
The Aussie dollar came under pressure this morning after the RBA hiked rates as expected to 4.85%, but delivered some dovish signals. First, the 6-3 split suggests lower conviction around today’s decision than in markets, which had almost fully priced in a hike (21bp). Second, the statement dropped its reference to potential further hikes for the first time since June. Third, the economic outlook was revised sharply to the downside, with a focus on falling house prices weighing on consumers and upside risks to unemployment.
At the press conference, Governor Michele Bullock reinforced the RBA’s wait-and-see approach, stressing that monetary tightening still has to feed through to the economy. She left the door open to further tightening, but the bar is clearly higher now. The RBA appears happy to assess the impact of previous hikes before acting again.
This is in line with our forecast of no further RBA hikes. Despite today’s correction, we remain positive on AUD, which offers the best short-term carry in G10, including on a volatility-adjusted basis. Markets price only a one-in-three chance of another hike at the coming meetings and already embed 13bp of easing by the end of 2027, leaving AUD with limited risk of further dovish repricing for now. The current environment remains a bit challenging for AUD amid AI-related jitters, but we remain confident that our 0.710 AUD/USD target can be reached by year-end.
CEE: Zloty is the weakest link in the region
Yesterday’s PMI readings in the region confirmed the economy's strong position across the board. The outlook remains positive. With the exception of Turkey, all countries show PMI levels higher than those seen before the onset of the US-Iran conflict. The Czech Republic and Hungary appear particularly strong, hovering near or reaching new highs; Poland is edging higher, while Romania has declined once again. Overall, however, the economy continues to show resilience, pointing to a stable outlook for the coming months.
Today, Turkey’s inflation data for October is released. We expect monthly inflation to accelerate from 1.8% to 2.4%, driven by increased energy cost pressures, which the Central Bank of Turkey has identified as an upside risk, as well as seasonal rises in food and clothing prices. This would result in a slight decline in annual inflation, from 29.7% in September to 29.6%. This should be sufficient to allow for at least one more rate cut by the CBT this year.
EUR/PLN tested new highs yesterday following political headlines over the weekend. In our view, these developments provide further bearish momentum, suggesting additional downside for the zloty. Naturally, global conditions remain unfavourable, characterised by a strong US dollar and high energy prices, despite some improvement yesterday. Furthermore, Poland’s public finance deficit, the highest in the EU, leaves the country exposed to potential turmoil in the euro-denominated bond market. Additionally, we anticipate a dovish tone from the National Bank of Poland at this week’s meeting. Taken together, we continue to view the zloty as the weakest link in the CEE region and expect the EUR/PLN pair to settle above 4.420.
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