Forex Today: Democrats gain control of Congress, putting US Dollar under pressure

Wednesday, 4 November: the key developments to watch

Preliminary Eurozone inflation figures for October lead the European economic calendar on Wednesday, while the US Dollar (USD) loses ground against its major counterparts in early trading as investors weigh the midterm election results. Attention later turns to the United States (US), where market participants will scrutinise ADP Employment Change figures and the Institute for Supply Management's Services Purchasing Managers' Index (PMI).

Victory in both the Senate and the House in the midterm elections has given the Democrats control of the US Congress for the final two years of Donald Trump's presidency. According to the Wall Street Journal, Trump said the Iran war was "partly to blame" for the Republicans' defeat, while ruling out personnel changes within his administration. In the initial response to the results, US stock index futures are mixed. The USD Index remains in negative territory around 101.50, while the benchmark 10-year US Treasury bond yield remains under pressure below 4.95%.

Dollar support wanes as US equities and Nasdaq come under fresh pressure

Commerzbank analysts point to the equity market as a potential source of pressure, warning that “US equities, and the more tech-heavy Nasdaq in particular, are likely to come under pressure today,” and observing that the Dollar's recent strength has “benefited substantially in recent months from the enthusiasm surrounding US equities and the resulting capital inflows.” With that equity-related support fading, their warning is that “Dollar weakness could therefore become somewhat more entrenched over the coming hours.”

On the outlook beyond the initial market response, Commerzbank also argues that “if political debate in the United States were to shift back toward a more constructive direction, admittedly a very big if, this could reduce the political risk premium embedded in the US Dollar and provide the currency with structural support over the longer term.”

Gold is gaining upward momentum on Wednesday as widespread USD weakness lends support, with a rise of more than 2% taking the metal above $4,000.

New Zealand's unemployment rate increased from 5.6% to 5.7% in the third quarter, figures released early in the Asian session showed. The reading was worse than the market forecast of 5.5%. Nevertheless, the disappointing labour market release has not prevented NZD/USD from building upward momentum on Wednesday, with the pair trading just above 0.5600 and around 0.4% higher on the day.

EUR/USD has surrendered some of its daily advance, easing towards 1.1230 after reaching a new two-week high above 1.1250 earlier in the session. Annual growth in the Harmonised Index of Consumer Prices (HICP) is forecast at 4%, compared with September's 3.8% increase.

GBP/USD is trading above 1.3450 at its strongest level since mid-September, taking its run of daily gains to six on Wednesday. A rate rise of 25 basis points is expected to be announced by the Bank of England (BoE) on Thursday.

USD/JPY recovered some ground after a steep fall in Wednesday's Asian session. The pair nevertheless remained around 0.4% lower on the day at the time of writing, trading just above 158.00.