The USD struggled to capitalise on renewed risk aversion as investors entered November cautiously ahead of today’s US midterm elections. The DXY Index edged down to 101.8 from Friday’s close of 101.9, despite further losses in the S&P 500 and a sharper 1.1% decline in the Nasdaq Composite. US equities surrendered early gains as concerns over AI-related capital expenditure and investment returns outweighed relief from lower oil prices. Brent crude plunged 11.3% to around USD 104 per barrel after US President Donald Trump cast doubt on renewed attacks on Iran after the midterms amid talks between Iranian and Qatari officials in Doha aiming at finding a deal to end the conflict. Hopes of easing oil supply disruption also pushed US Treasury yields lower, eroding support for the USD.
Attention now turns to whether the US midterms will shift control of Congress to the Democrats. The outcome will have implications for fiscal spending, debt-ceiling negotiations, and the regulatory outlook for AI. The December 11 expiry of the Continuing Resolution could provide an early indication of how a Democratic-controlled Congress might approach the more consequential debt ceiling negotiations in 2027. A contentious funding debate during the lame-duck session (which ends with the recess starting on December 18) could foreshadow greater gridlock next year, particularly if spending negotiations are extended into the new Congress.
Beyond the elections, investors will reassess whether lower oil prices and this Friday’s US monthly employment report provide sufficient grounds for the Fed to reconsider its tightening bias. Market-implied probability of a December 9 Fed hike has declined to 73.5% from a peak of 90.8% on October 19. New York Fed President John Williams may reinforce the distinction between another hike in December and a prolonged tightening cycle into 2027 when he participates in a moderated discussion organised by the European Central Bank on November 6. At the October 28 FOMC meeting, Fed Chairman Kevin Warsh indirectly tempered expectations of further tightening by announcing plans to reduce the number of scheduled interest rate-setting meetings next year.
This week’s events could prompt the DXY to extend its retracement of the 4.5% rally from 98.6 in September to 103 in mid-October.
Quote of the Day
“Don't limit your challenges; challenge your limits.”
Tim Robbins
Today in history
On November 3, 1957, the Soviet Union launched Sputnik 2, carrying a stray Moscow dog named Laika into orbit, making her the first living animal to circle Earth.
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