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Dollar Strength against Euro Eases, Democrats said to be "Slightly Favoured" to Win Senate

- EUR/USD steadies following sharp fall
- USD outlook tied to outcome of November vote
- Senate race will be key to the market outlook

Dollar outlook

Image © Adobe Images

  • EUR/USD spot at time of publication: 1.1744
  • Bank transfer rates (indicative guide): 1.1330-1.1420
  • FX specialist rates (indicative guide): 1.1643-1.1650
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The U.S. Dollar eased back into the mid-week session amidst an improvement in global investor sentiment that saw stocks and commodity prices rise amidst ongoing signs that the U.S. November election will ultimately deliver a market-friendly outcome.

The market has flipped from seeing a Joe Biden White House as being a negative for 'risk on' assets to being supportive, given his party's willingness to spend big on a coronavirus relief package if elected.

However, any package will require the support of both the House of Representatives and the Senate; with the Democrats controlling the House a market-friendly 'blue wave' outcome therefore also rests with the Democrats flipping the Senate away from the Republicans.

The Senate is therefore seen as a source of major uncertainty for the market-positive/dollar-negative narrative. Furthermore, persistent questions over the accuracy of polling and the ability of modelling to call the result will likely remain a short-term feature that should keep market's churning around current levels.

"Major markets have become riddled with uncertainty. Although there is still an expectation that Joe Biden is (currently) very well placed to become President, just under three week’s to go there is plenty of time still for Trump to engage a recovery," says Richard Perry, an analyst at Hantec Markets.

Uncertainty allowed the Dollar to advance by a sizeable 0.60% against the Euro on Tuesday, while against Sterling the advance was a chunkier 1.0%.

"The more 'risk off' mood in markets has led to the US dollar appreciating against the euro and sterling," says Rhys Herbert, economist at Lloyds Bank.

Doollar Index mpvements

Above: October movements in the Dollar index - a measure of broad Dollar performance against a basket of currencies.

However the Dollar's strength has eased in midweek trade as investor risk sentiment recovers and we see the Euro-Dollar exchange rate flat at 1.1733. The Pound-to-Dollar exchange rate meanwhile extends lower and is seen at 1.2884, a move that is largely driven by Sterling weakness owing to uncertainty over the outcome of Brexit trade negotiations which are entering their final straight.

If election expectations are wagging the market then investors will likely be reacting to a poll out overnight revealing Biden’s lead over Trump has surged to a record 17 points, according to an Opinium Research and Guardian opinion poll.

Some 57% of likely voters intend to vote for Biden, while just 40% say they will vote for the incumbent president, the survey shows.

Expect market sentiment, and Dollar moves, to remain fixated on developments in the U.S. election. (We have issued a new guide on the Dollar's outlook with regard to the 'blue wave' outcome, and have commentary and tables from the likes of Goldman Sachs, Barclays, UBS, JP Morgan and more. Get the guide here.)

Biden and the Democrats seem to be carrying the momentum into the final weeks, but a rejuvenated Donald Trump will likely step up his campaign to try and keep himself in the game. Indeed, he will embark on a packed schedule of rallies in key states over coming days to try and shift the narrative.

But it remains the Senate race where the 'blue wave' outcome will be most closely fought.

In the Senate the Democrats are trying to overturn the 53 to 47 Republican majority, and current polling and modelling suggests this is achievable, although by no means guaranteed.

Modelling by FiveThirtyEight - which runs 40K simulations to gauge the most probable outcome - shows the Democrats "are slightly favoured" to win the Senate.

However, FiveThirdyEight's assertion that the Democrats are "slightly favoured" is at odds with their own modelling that says there is a 70% chance of such an outcome:

Control of the senate

Image courtesy of FiveThirtyEight.

There are 35 senate seats out of 100 that are being contested this year, of these as few as 8 seats are considered either tossups, or expected to be flipped into Democrat seats.

The Republicans are nevertheless concerned. "Democrats are on fire," Mitch McConnell, the Senate majority leader, was said to have told lobbyists on a recent call. According to The Times he is understood to have urged Republican candidates to use any means possible to win their seat, code for distancing themselves from Trump if it helps.

Biden's odds of securing the Presidency are however looking more assured with polling and modelling leaving 538 predicting Biden has a 81% chance of winning in November.

For markets, this outcome appears to be supportive of risk and negative for the U.S. Dollar.

"The correlation between the likelihood of a Biden victory (according to PredictIt) and US equities pricing has turned positive recently, while correlations with safe-haven assets such as UST, JPY, and USD have all turned negative," says Nikolaos Sgouropoulos, a foreign exchange strategist at Barclays.

Biden and the markets

Image courtesy of Barclays

"The widening Biden/Democratic poll lead has also somewhat allayed market concerns about delayed election outcomes," says Sgouropoulos.

Fears had been elevating that a contested election outcome would spell weeks of uncertainty as both sides disputed the election outcome in the courts, which would inject policy uncertainty into markets and prompt declines in equity markets and rises in safe haven assets such as the Dollar and Yen.

However, the threat of a disputed outcome cannot yet be ignored.

"We caution that a close electoral vote and contested races in key battleground states, where polls are much tighter than the national average, still suggest risks of election disputes," says Sgouropoulos.

Biden and the markets

Image courtesy of Barclays

"Evolving market dynamics related to US election prospects appear to reflect a greater focus on fiscal spending under a Biden administration compared with earlier concerns about tax hikes," says Sgouropoulos. "A large-scale phase four fiscal stimulus may be postponed until after the US election, with a still-significant gap between Democrats and Republicans and an uncertain schedule for bipartisan talks. Hence, a Democratic sweep might translate to not only the possible implementation of Biden’s original policy agenda of tax-funded spending, but also an increased likelihood of large phase four stimulus."

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