Will U.S. Mid-Term Election Affect EUR/USD Trend?

Even if the Financial Times analysts’ claim that the US mid-term elections is a less significant factor than trade wars; their outcomes will affect the financial markets and global economy. If the Republicans win, it will be the expression of confidence in Donald Trump and his policy. The entire world will have to accept protectionism as the inevitability and put up with it. On the contrary, the Democrats’ victory will remind investors that the present US president will resign someday, and the Old America will be back.

According to the poll collected by FiveThirtyEight, there are 7 out of 8 chances the Democrats will win the House of Representatives, the chances the Republicans will take the majority in the Senate are 5 to 6. Experience proves that the stock indexes were quite strong when the Congress was pided; so there are no reasons to worry about it. The turmoil in the financial markets in October is likely to have resulted from including the factor of midterm elections and trade wars into the financial instruments’ rates. Storms are replaced with calms; so, I don’t think that the policy matters will result in strong movements for the EUR/USD.

Obviously, the major driver for the USD 8-percent increase since April has been the growth gap between the US and the European economies that is evident in the widening US-German bond yield gap. The start of the ECB monetary normalization should hypothetically narrow down the gap; which suggests a positive outlook for the euro. Nevertheless, the euro-area core inflation and the GDP rate may not increase, and the federal funds rate hike in 2019 will support the interest in the US dollar. Currently, the greenback is highly demanded, as its speculative bets have hit the highest level since early 2017.

Dynamics of US dollar and the speculative positions

Source: Bloomberg

This fact, according to JP Morgan, increases the risks of mass triggering of stop orders and the EUR/USD correction. It is difficult for bears go lower. And the dollar’s response to the US strong employment data in October is the further evidence of it. However, the bank suggests the pair might fall lower in 2019 amid the remaining driver of the pergence in monetary policies.

Morgan Stanley (NYSE:MS) doesn’t agree, projecting the euro to be at $1.32 in late 2019. It is remarkable that Rome may become a supporting factor for the euro; as the shift form the fiscal consolidation policy, promoted by Angela Merkel, who is going to leave, and the focus on the economy expansion can unite Europe, rather than to separate it. According to Luigi Di Maio, leader of the Five Star Movement, the Italy’s “expansive budget” will become “a recipe” for reviving European growth after the many years of inefficient economic theory. He could be right in his projections.

I still believe that hardly anything will change for EUR/USD until the results of the FOMC meeting in November are released. The consolidation in the range of 1.13-1.15 ahead the important event suggests it should have a strong influence.

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