Market Wrap: Midterms to Determine the Dollar’s Fate as Other Currencies Shine

Market Analysis /
07 Nov 2018

Financial markets have continued the positive start to the month, with US equities posting solid gains on the eve of the Congressional elections. With the Dow gaining 0.69%, the S&P 500 up 0.63% and the NDAQ rising 0.64%, risk-assets have performed well of late despite the political uncertainty surrounding the direction of the US economy. The prospect of a political ‘gridlock’ (should Congressional control be split amongst the GOP and Democrats) could apply the brakes to the US economy, but to what extent? And how will this impact the trade stand-off between China and the US, as well as trade agreements between the US and its neighbours in Mexico and Canada? It is this very uncertainty that’s creating USD weakness and allowing other currencies to have their time in the sun. One of those being the British Pound (GBP).

If there is political uncertainty in the US (which there is), then this case equally applies to the UK where Brexit negotiations have been the never-ending story of financial markets for the past two years. And so, the saga continued overnight, firstly with reports from a UK politician that a Brexit deal was not on the cards, sending the GBP towards the lows of the day at around the 1.3022 levels. However, the GBPUSD rate quickly bounced back and then posted fresh gains after a seemingly positive UK Cabinet meeting, with the rate moving to hit the 1.31 mark. So, with Sterling up another 0.5% today it seems that traders are still willing to give the benefit of any doubt to lawmakers that a deal will eventually get done. Expect moves in this currency to remain headline and speculatively driven at least until we see the latest UK GDP print on Friday this week.

Elsewhere in the currency space, the EURUSD rate was in consolidation mode above the 1.14 level as the Euro solidified recent gains. The single currency does face continued pressure over the disagreement between the EU Ministers and Rome over how the Italian Budget should be set, with there even being talk of possible sanctions should the Italian Government not comply. Added to this is the fact that Italian economic data has been dismal, as further evidenced by the Services PMI data which came in below the key 50 level. But for the moment at least, the muted USD we are seeing is giving the Euro a reprieve, with traders eyeing resistance at around the 1.1452 level as the next upside target should greenback weakness persist.

The Australian Dollar is again being well supported, despite the RBA rate announcement being a non-event on Tuesday and persistent weakness in commodities such as oil with WTI crude falling a further 1.4%. But the AUD was unfazed and instead followed equities higher. There was very little new information to glean from the RBA statement after the central bank left rates at 1.5%, with the focus now on the more expansive Monetary Policy statement due for release on Friday. Technically, there are some bullish indicators for the AUDUSD rate which may signal that a further advance above 0.72 and towards 0.73 is due, though much will depend on how the USD holds up between the election results and when the FOMC meet later in the week.

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