FX Daily: Dollar Holds Gains Into Midterms

At the start of a very busy week for FX markets, the dollar is largely holding onto recent gains. In focus are the US midterms, where betting markets attach a 70% probability to a clean sweep for the Democrats. Away from politics, we'll receive updates on the US jobs market this week and are expecting rate hikes in the UK, Australia and Sweden.

The US midterm elections are set to dominate a busy week in FX. A clean sweep for the Democrats is expected, but the macro story can keep the dollar supported.

USD: Contemplating the midterms

The dollar is fractionally lower at the start of the week. It may be taking its cue from oil prices, which are off 2-3% on reports that US President Donald Trump wants to let diplomacy run its course with Iran. That reverses Friday's sentiment, where some had positioned for a fresh attack this weekend. Please see our latest thoughts on the oil market here.

In focus this week are the US midterm elections. Betting websites give the Democrats a 70-72% chance of taking both the House and the Senate. One could make the case that the dollar should come lower on such an outcome, since it would likely lead to gridlock on the debt ceiling, a prolonged government shutdown next year and could encourage President Trump to pursue an even more activist foreign policy agenda. Many of those views are speculative, however. What is not speculative is the US economy posting a strong 3.4% quarter-on-quarter annualised growth rate in the third quarter, inflation remaining above target for a sixth year in a row, and the Federal Reserve readying to tighten again.

Feeding into the US macro debate this week will be ISM business surveys and jobs data. Business surveys are expected to show continued optimism, along with high price pressures. And Friday's October jobs report is expected to show a modest rebound after a soft September figure. Barring a wholly disastrous report on Friday, we doubt the jobs data really moves the needle on the Fed tightening story. Price data is more important here.

There will be continued focus on the tech sell-off, however. Apple reports after the market close today. The 9% Nasdaq sell-off last month has driven a softening in short-dated US rates, and any further large sell-off in this sector is probably the biggest risk to long dollar positioning.

Expect DXY to continue trading around 102.00, and we do not see a strong case for a correction lower.

EUR: Fitch puts the boot in

Unwelcome news for French politicians late Friday came in the form of an unscheduled ratings review from Fitch. It shifted its outlook on French sovereign debt from stable to negative and promised another ratings review by the end of February. It currently rates France as A+. Reasons for the outlook shift are familiar by now, but they centre on the government's failure to improve public finances at a time of weak growth. Let's see whether this unscheduled move puts much pressure on the OAT-Bund spread today. We would think that the news limits the potential for EUR/USD to rebound on softer energy prices.

We suspect there will be more EUR/USD sellers in the 1.1200/1250 area should it make it that far. The news should also keep EUR/CHF pressured towards Friday's lows at 0.9180/85.

GBP: 25bp BoE rate hike fully priced for Thursday

Sterling is trading reasonably well. Helping it has been the view that high energy prices leave the Bank of England no alternative but to hike rates on Thursday. A 25bp rate hike to 4.00% looks like a done deal. Upside economic surprises, UK fiscal policy seemingly heading in the right direction and warmer ties with the EU all seem to be helping sterling too. Notably, speculators are still running reasonably large short positions in sterling, which suggests this period of sterling outperformance can continue.

EUR/GBP has come a long way very quickly – a near 4% drop in a little over a month. Some consolidation is probably due. But with high energy prices likely to keep expectations of higher UK policy rates in place until early next year and French budgetary problems unresolved, it is too early to expect a significant low in EUR/GBP.

CEE: Central bank divergence meets renewed FX pressure

With the start of a new month, the CEE narrative is becoming more attractive once again. Today, PMI data for the region will be released. Since the onset of the US-Iran conflict, these figures have either remained stagnant or trended upward, indicating that the economies are currently showing strong resilience to the energy shock.

Tomorrow, we will see Turkey’s inflation figures for October. Our estimates suggest a monthly acceleration from 1.8% to 2.4%, while the year-on-year figure is expected to tick lower to 29.6%.

On Wednesday, Hungary’s industrial production data and the Czech Republic’s October inflation figures will be published. We anticipate an acceleration in headline inflation from 2.5% to 2.6%, and a further rise in core inflation from 3.1% to 3.3%. The National Bank of Poland is also expected to keep rates unchanged at 3.75% and present a new forecast. We do not anticipate the first rate hike until the first quarter of 2027.

On Thursday, the Czech National Bank will follow, likely raising rates by another 25bp to 4.00% while also presenting a new forecast.

Trading on Friday saw a return of risk-off sentiment, following a brief period of relief after the Fed and European Central Bank meetings. The combination of rising energy prices and a stronger dollar globally, alongside generally dovish central banks within the CEE region, will continue to exert pressure on local currencies.

We maintain our dovish bias for this week as well. EUR/PLN has returned to the 4.400 level following a brief dip below 4.390. Should the NBP confirm a dovish stance this week, we could see the pair test new highs above 4.410. In line with our expectations, EUR/CZK has returned to the 24.300–350 range, which we consider fair for the time being. Although we anticipate a hawkish stance from the CNB, the bar is high given that 100bp of tightening is already priced in and the koruna has a tendency to weaken slightly following CNB meetings. We could see the pair move slightly above 24.350 again.