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Midterm results dominate trading in FX

By Alex Edwards

Traders and investors were still digesting news of the US midterm election results yesterday morning as the dollar weakened and stocks appreciated. There’s a feeling that a split Congress may make it more difficult to push through fiscal stimulus, which weighed on the greenback and yields through the early part of the day yesterday. GBP/USD pushed higher, trading close to 1 month highs.

Cable then gave up most of these gains during the New York session and overnight, slipping back towards the 1.31 interbank level. But this pair has traded a yo-yo range over the last few weeks, and true to its reputation it’s bouncing this morning.

There’s no major economic UK data due for release today, but investors will be looking closely to the Fed monetary policy decision later tonight. The central bank is firmly expected to leave its base rate unchanged, and in this respect there may be little by way of market reaction, with the Fed still on track to hike again in December.

All eyes were closely watching mid-term election results in the United States early yesterday morning. Volatility was heightened heading into the results as liquidity remained thin. As numbers came in there were swings either way in the Dollar Index as it traded in a wide range for a number of hours between 95.90 and 96.45, eventually settling lower as the Democrats defeated the Republicans and took control in the House of Representatives.

Under a split Congress, it will be harder for President Donald Trump to push through any new stimulus or tax cuts and as expected the greenback came under selling pressure against the majority of currencies through the morning session on Wednesday.

The DXY finished the day lower but has recovered overnight, or sorts, ahead of the central bank policy meeting tonight, at which it is expected the Federal Reserve will keep interest rates on hold. Market participants will be keen to see any changes to the FOMC statement with the CME Fedwatch tool suggesting that there is a 75% chance of a fourth hike this year at December’s meeting.

The euro edged marginally higher through trade on Wednesday as investors absorbed the results of the US congressional elections, but couldn’t quite make the move above 1.15. It slipped back during the last London session and at one point this morning looked like it may break below the 1.14 big figure.

It didn’t , or at least it hasn’t yet, and the EUR/USD pair opens this morning at 1.1425 as markets await the FOMC later tonight. ECB President Draghi is also due to speak today, as too are ECB members Villeroy and Benoit Coeure, and to this point we may see a bit of volatility in the euro come this afternoon.

It was a wild ride for the Australian dollar on Wednesday, trading as high as 0.7299 versus the USD. The driving factor were the mid-term elections and as we began to see final numbers released the aussie surged to a 6-week high. However, as the North America session began, the pair drifted slightly lower.

It’s now flirting with a break of the .73 figure again and opens in London at .7285. There was no local data scheduled for release overnight, but Friday sees the release of the RBA’s monetary policy statement which provides valuable insight into the bank's view of economic conditions and inflation minutes.

Trading in USD/CAD dominated in early proceedings by the result of mid-term elections and the pair was sold from 1.3120 to 1.3055.

The CAD’s gains were then erased in the North American session as a slide in crude oil prices took hold. WTI crude lost more than $1 a barrel, falling to $61.30, a 7-month low. This came mostly as a result of further increases in supply to 7.8 million bbl for the week ending November 2nd, as reported by the American Petroleum Institute. USD/CAD pushed back to a high of 1.3125 but has since settled lower to open this morning at 1.3100.

NZD/USD has traded a narrow 25 point range over the last 24 hours, and remains well supported at these new heightened levels following the release of the strong employment figures released earlier in the week. In other news yesterday, the RBNZ announced that it would be keeping interest rates on hold at 1.75%. In his accompanying statement, RBNZ Governor Orr said that he would not rule out a rate cut, and had no view on the level of the kiwi. There wasn’t much reaction in NZD/USD.