The US will hold its midterm elections - a de facto referendum on the Trump administration - on 3rd November after two years shaped by rising trade protectionism, attacks on Federal Reserve independence and, since the spring, the Iran war.
Highlights:
→ Republicans seen taking heavy electoralhit on 3rd November.
→ Democrats favoured to flip the House,with Senate a closer call.
→ We see a Democratic sweep as most likely (60%), with split Congress at 30%.
→ Democratic House and RepublicanSenate our most bearish outcome for USD.
→ A Republican hold is the bullish tail risk for the US dollar.
Republicans are expected to take a heavy electoral hit. A meaningful share of their voter base opposes the war and has never been given a convincing enough justification for it - not least as one of Trump’s central campaign pledges was to keep the US out of new conflicts. The economic fallout has also worked against the incumbent president and his party, with rising inflation and higher interest rates deepening the affordability crisis.Against this backdrop, Democrats are expected to make substantial gains.For markets, the most important implication of the elections will be the impact on fiscal policy. Given the broad sell-off in Treasuries in recent months, which has pushed yields to multi-decade highs, we expect the midterms, and their potential impact on fiscal policy,to take on added importance and face more scrutiny than usual,raising the risk of an amplified market reaction, including in FX.
Read the complete analysis to discover the four dollar scenarios following the Midterms.
