Polls suggest that the Republicans will keep a majority in the Senate, while the Democrats may take the House of Representatives. If the Democrats do win the House, their main focus will be to lay the groundwork for the 2020 election, when the party hopes to win back the presidency as well as the majority in the Senate. We do not expect any change in trade policies or an infrastructure program. Instead, we expect the Democrats to attempt to use the control they gain over House committees to expose the president. This could be the beginning of the end of Donald Trump. Although financial markets generally like stabilization in politics, a defeat of Donald Trump, who has been recently linked mainly with a trade war, would be welcome.
We think US midterm elections could affect sentiment in the currency market. Following Donald Trump’s election as US president on 8 November 2016, the USD rallied sharply, with the Fed’s trade-weighted US dollar index ending 2016 more than 5% stronger than its pre-election level. Despite the correction that followed in 2017, when the index fell almost 10% yoy, many people still associate the Trump administration with USD strength. This impression has probably been shaped by the effect of Trump’s protectionist trade policies, which have been responsible for a good part of the 4.4% appreciation of the USD in trade-weighted terms since the beginning of the year. The conclusion is – if the Democrats win the House, the dollar could weaken.
If Democrats win, we expect appreciation of commodity currencies (CAD) and especially currencies related to Chinese economy (AUD). On the other hand, safe-haven currencies (USD, JPY) are likely to drop.
EUR/USD
Trading strategy: Long
Open: 1.1400
Target: 1.1570
Stop-loss: 1.1345
Recommended size: 2.67 mini lots per $10,000 in your account
Short analysis: Yesterday’s close above 7-day exponential moving average was an important bullish signal. A pressure coming from long upper shadow on Friday’s candlestick line is not so strong now We think that U.S. midterm elections results should weaken the USD and that is why we keep our bullish outlook here. In our opinion, current levels are still attractive to open a long position.
