Democratic sweep weighs on dollar and yields, lifts gold

Democratic control pressures dollar and Treasury yields

The US dollar traded higher against most of its main peers on Tuesday, losing some ground only against the euro and the pound. However, the greenback is underperforming against all the other major currencies on Wednesday as Democrats have secured both the House and Senate in the US midterm elections.

Control of both chambers of Congress means that Democrats have increased power to block Trump’s plans and considerable leverage over budgets, appointments and congressional investigations. Tax reductions, additional fiscal stimulus and deregulation are now less likely, while investors are also concerned about increased scrutiny regarding artificial intelligence, data-center development, banks and cryptocurrencies.

This could lead to slower growth, but also fewer concerns about inflation spiraling out of control and the need for further Fed rate hikes, especially now that Trump’s protectionist policies are likely to face stronger resistance. That’s maybe why Treasury yields slid and the US dollar retreated. Indeed, although there is a strong 80% chance that the Fed will press the hike button at the December gathering, investors are now baking into the cake only 30bps worth of additional rate increases for 2027.

Regulatory concerns and mixed earnings cloud stocks

What’s more, speculation about stricter regulation and increased scrutiny related to AI and cryptocurrencies has led to further weakness in stocks. Wall Street’s tech-heavy Nasdaq closed positive yesterday, but futures slipped overnight. However, they entered a recovery mode again during the European morning session.

Even if stocks extend their rebound on the prospect of fewer rate hikes by the Fed – especially if Friday’s Nonfarm payrolls disappoint – the elephant in the room is potential gridlock during budget and debt-ceiling negotiations. A Democratic Congress can suggest concessions, but the Trump administration could still veto any Democrat-led proposals, increasing the probability of a shutdown and perhaps market volatility during 2027.

As for the earnings season, AMD’s results beat forecasts yesterday after the closing bell, with data-center sales accelerating and thereby supporting the semiconductor sector. The Philly Semiconductor Index rebounded somewhat yesterday. However, although Apple’s numbers were also solid, its stock fell as investors were not satisfied with the outlook. Gross margin forecasts were reduced amid higher chip prices and AI-related costs, while service growth also slowed.

Oil remains hostage to geopolitics

Oil prices fell sharply on Monday amid headlines about progress in US-Iran negotiations and rumors about the two sides agreeing on a memorandum of understanding. That said, Tehran denied the rumors and noted that the Strait of Hormuz would reopen only if the US met its requests.

What’s more, the US proceeded with strikes on Iran’s Qeshm Island, providing a reality check to investors, who stopped the slide of WTI crude oil near the 50-day exponential moving average (EMA) slightly below the $97.00 zone. Trump said that there was no immediate plan for more attacks, so it remains to be seen whether more truce-related headlines hit the wires today. If more progress in talks is reported, oil is likely to resume its slide, easing inflation-related fears and thereby allowing for more dollar selling.

Gold bounces back above $4,000

Gold celebrated the Democrats’ victory, rebounding by more than 2.5%, and returning above the round figure of $4,000. The retreat in the dollar and Treasury yields, the reduced Fed hike bets, and the risk aversion on Wall Street, increased gold’s appeal. The precious metal is currently trying to break above the downtrend line drawn from the high of August 25, with the bulls perhaps eyeing the $4,100 zone next. A break of that resistance could pave the way for the $4,200 area.