Can the Euro hold its gains as the US Dollar weakens after midterm elections?

• EUR/USD retains gains as US Dollar selling follows Democrats’ victory in Congress.
• The Greenback recoups part of its losses as US employment and services figures show resilience.
• December interest rate increases are expected by markets from both the Fed and ECB.

Broad-based US Dollar (USD) selling is keeping EUR/USD in positive territory on Wednesday after the US midterm election results. The pair is trading near 1.1235 at the time of writing, a gain of 0.35% for the day. Resilient US economic figures have nevertheless helped the Greenback claw back some losses, pulling EUR/USD below its intraday peak of 1.1273.

Heavy selling has hit the US Dollar after Democrats gained control of both houses of Congress, increasing the risk of a political impasse in Washington. At around 101.45, the US Dollar Index (DXY) is 0.40% lower on the day. The index, which measures the Greenback against a basket of six major currencies, has rebounded from an intraday trough of 101.21, its lowest reading since September 30.

Oil prices, meanwhile, have dropped steeply on speculation among traders that a Congress controlled by Democrats could curb funding for Trump’s military campaign against Iran and intensify pressure to bring the conflict to an end. Down 9% on the day, West Texas Intermediate (WTI) is trading near $87 a barrel.

Lower energy import costs from cheaper Oil could provide some respite for the Eurozone economy and temper inflationary pressures worldwide. Yet uncertainty persists in the absence of a clear route to a negotiated end to the conflict, leaving Oil prices exposed to sharp fluctuations.

Private-sector employment rose by 86K in October, according to the ADP report, exceeding the 69K expected. September’s increase was revised lower, from 90K to 86K. Although the ISM Services Purchasing Managers Index (PMI) slipped from 54.9 to 54.5 and fell marginally short of the 54.8 forecast, it continued to signal expansion.

With policymakers seeking to return inflation to the central bank’s 2% target, these figures give the Federal Reserve (Fed) scope to retain its hawkish stance. According to the CME FedWatch Tool, markets assign an 80% probability to a further rate increase in December. The next focus will be Thursday’s weekly US Initial Jobless Claims, followed by Nonfarm Payrolls (NFP) on Friday.

A December rate increase by the European Central Bank (ECB) remains a possibility following the Eurozone’s preliminary October inflation figures, published earlier in the day. Both headline and core inflation stayed above the ECB’s 2% target: the headline rate climbed from 3.8% to 4.0% YoY, while the core reading was unchanged at 2.5%.

Warning on Tuesday that “core inflation, second-round effects will likely pick up,” ECB policymaker Klaas Knot also said the central bank “may have to approach [the] 2% goal more often from above.”