Market Insight – Election implications

Today, the focus is on the US midterm elections and a number of major investment banks are not expecting that the outcome of today’s result will have a big impact on the US dollar.

The greenback has been particularly volatile over recent weeks as traders attempt to weigh up and price the Fed pivot and the ongoing inflationary backdrop.

Strangely, economists at Danske Bank do not expect the election result to be a major market mover in the near-term. The banks notes that “Republicans are favoured to win control of both House and Senate, although the Senate race remains a close call.”

And they state that “If republicans win the Senate by a slim margin or if Democrats are able to retain the Senate, market reaction should be quite muted, as major changes in fiscal policy would be difficult to pass.”

“The risk-scenario for markets would be a clear victory for Republicans also in the Senate, as this could increase the risk of more expansionary fiscal policies amid the looming recession.” 

Strategists at Commerzbank also do not think that the Midterms will be a major event for the FX market. They note that “Four arguments suggest that currency traders are unlikely to make a significant reassessment of the USD if the Democrats lose the majority in one of the two chambers”

Laying out the 4 key points they note that “1. Losing the majority in the House will not change Biden’s political room for maneuver too much. 2. The fiscal room for maneuver is currently so limited that no new fiscal ‘bazookas’ could be expected anyway. 3. The recession expected by many in the US would be induced more by the Fed’s monetary than by the budgetary policy of Congress. 4. On other FX-relevant issues (such as trade policy), the differences between Democrats and Republicans are currently rather small.”

Additionally, they add that “One can certainly draw conclusions from the election outcome that could be relevant for USD rates in the long run, such as what they say about the likely outcome of the presidential election in 2024. But honestly, we will get a lot more relevant information about that in the next two years. There is no reason for the forex market to bet on it already.”