By John Cameron
The Euro US Dollar (EUR USD) exchange rate is traded in a very narrow range on Tuesday as investors remain reluctant make any moves ahead of the US mid-term elections.
US Dollar (USD) On Hold as Markets Await Outcome of US Mid-Term Elections
The US Dollar (USD) is range bound against the Euro (EUR) and the majority of its other currency peers today as election fever takes hold of markets.
Investors are currently erring on the side of caution as US voters go to the polls in what is set to be one of the most hotly contested mid-term elections in living memory as it serves as the first real test of Donald Trump’s Presidency.
Today’s election will see if the Republicans are able to keep hold of the two Houses of Congress or whether a ‘blue wave’ will see the Democrats wrestle control away from the Republicans and potentially allowing the Democrats to block and even reverse Trump’s policy plans.
The latter is seen as being particularly Dollar negative as it could prevent Trump from implementing further tax cuts and complicate his fiscal plans.
Current polls suggest the Democrats are likely to flip the House of Representatives but fall short of taking the Senate and outcome that won’t be seen as quite as negative as a Democrat dominated Congress, but could still dent USD confidence for fears of future deadlocks in Washington.
Jasper Lawler, Head of Research at London Capital Group explains:
‘Dollar bulls are looking for a Republican win, which will supportive of more of Trump’s expansionary fiscal policies being pushed through. A Democrat win, and the resultant political deadlock is considered more bearish for the US Dollar and US equities although we expect this to be a short-term reaction.
‘The unexpected result of a blue wave with Democrats taking both the Senate and the House would likely shock the markets resulting in an aggressive selloff in the greenback and US equities.’
Euro (EUR) Muted as Eurozone Private Sector Slows
Meanwhile the Euro (EUR) exchange rate is also treading water today, following the release of the Eurozone’s latest PMI figures.
According to data published by IHS Markit, the Eurozone’s composite PMI slumped from 54.7 to 53.7 in October.
While this was slightly higher than a preliminary reading of 53.3, this still resulted in the Eurozone’s private sector expanding at its slowest pace in over two-years.
The drop was partly blamed on ‘global protectionist measures’, with suggestions that Trump’s tariffs on EU steel and elevated trade tensions were dampening demand for exports.
Chris Williamson, Chief Business Economist at IHS Markit, said:
‘An export-led slowdown, linked to growing trade tensions and tariffs, has been exacerbated by rising political uncertainty, growing risk aversion and tightening financial conditions. The slowdown has consequently become more broad-based to increasingly envelop the services economy.’
EUR/USD Exchange Rate Forecast: Fed Outlook to Drive US Dollar Later in the Week?
While today’s mid-terms are likely to shape the Euro US Dollar (EUR/USD) exchange rate through the first half of this week’s session, looking to the second half of the week the focus may turn back to the US economy as the US Federal Reserve delivers its latest interest rates decision.
With the Fed’s next rate hike not expected until December, the focus for USD investors following this week’s meeting will mostly be on the bank’s economic outlook for 2019 and whether the Fed will continue to accelerate rates at its current pace.
In the meantime the Eurozone will publish its latest retail sales figures on Wednesday, with another subdued reading in September unlikely to inspire demand for the Euro.