Democrats' Midterm Victory Sends Dollar and Oil Lower

The Democrats' victory in the United States (US) midterm elections has reduced expectations of further escalation in the Iran conflict, weighing on the dollar and oil, while investors await the Bank of England's (BoE) latest interest-rate decision.

Market Wrap-Up: Dollar Weakens, Oil Falls for Fourth Session as Political Risks Shift

The US dollar edged lower on Thursday after Democrats secured majorities in both chambers of Congress in the US midterm elections, easing political uncertainty and raising market expectations of a lower risk of further escalation in the US-Israeli war on Iran. The result also supported global equities and US Treasuries, while lower Treasury yields added to pressure on the greenback.

The US Dollar Index (DXY), which measures the dollar against a basket of major currencies, fell 0.06% to 101.41, extending its 0.36% decline in the previous session. The euro rose 0.12% to USD 1.1241, while the Japanese yen strengthened 0.08% to 158.25 per dollar.

Ray Attrill, head of foreign exchange (FX) strategy at National Australia Bank, said the prospect of political gridlock in Washington had reduced expectations of further US military action against Iran. He also linked the weaker dollar to lower Treasury yields following the election outcome.

Oil prices fell for a fourth consecutive session, extending their decline amid expectations that the election result could reduce the likelihood of further escalation in the Iran conflict. Brent crude fell 1.03% to USD 93.65 a barrel, while West Texas Intermediate (WTI) declined 1.29% to USD 86.98 as of 02:11 Greenwich Mean Time (GMT) on Thursday. Both benchmarks had already tumbled by more than 8% in the previous session, settling at their lowest levels since August 31.

The prospect of a diplomatic resolution has strengthened expectations of a further recovery in Middle Eastern oil supplies. According to analysts, crude shipments through the Strait of Hormuz have already recovered to levels close to those seen before the war, although at higher costs. JPMorgan estimated that the global oil market returned to a surplus of 1.1 million barrels per day in September, widening to 1.4 million barrels per day in October.

However, the outlook for oil remains uncertain. Analysts have cautioned that geopolitical risks persist, while commercial inventories in major consuming countries are near their lowest levels in 15 years. The US Energy Information Administration also reported that crude oil, petrol, and distillate inventories all declined last week, with demand reaching its highest level in a year.

In precious metals, gold rose above USD 4,000 an ounce on Wednesday as the weaker US dollar and lower Treasury yields supported the precious metal. The weaker dollar supported demand for dollar-priced bullion, while investors continued to assess the potential economic implications of the US election outcome and the Federal Reserve's (Fed) policy outlook.

In currency markets, sterling held near a seven-week high ahead of the BoE policy announcement on Thursday. The central bank is widely expected to raise interest rates from 3.75% to 4%, marking its first increase since August 2023. Higher energy prices have pushed United Kingdom (UK) inflation to 3.5% in September, above the BoE's 2% target.

Meanwhile, the yen strengthened after minutes from the Bank of Japan's September meeting reinforced expectations for further monetary tightening. One board member indicated that there could be scope for faster rate increases.

Markets will now turn to the BoE's policy decision for signals on the pace of further monetary tightening, while Friday's US nonfarm payrolls report will provide fresh insight into labour-market conditions and the Fed's policy outlook. Investors will also assess whether easing geopolitical tensions following the US midterm elections could continue to influence demand for safe-haven assets and broader market sentiment.

DXY

Key Takeaways

·         Democratic control of Congress raises the prospect of political gridlock in Washington, potentially limiting the administration's policy agenda and keeping pressure on the dollar.

·         Markets continue to price in a December Fed rate increase, with the probability rising to 81.2%, suggesting that monetary policy expectations remain supportive of the greenback.

Technical Outlook

·         Daily Bias: Neutral

·         Support: 101.10

·         Resistance: 101.94

Gold / US Dollar (XAU/USD) 

Key Takeaways

·         Expectations of reduced geopolitical escalation may moderate safe-haven demand, potentially limiting further upside in gold.

·         Friday's US nonfarm payrolls report could reshape expectations for the Fed's December policy decision, keeping gold sensitive to labour-market signals.

Technical Outlook

·         Daily Bias: Bullish

·         Support: 4,055

·         Resistance: 4,200

Brent Contract for Difference (CFD)

Key Takeaways

·         The prospect of a diplomatic resolution to the Iran conflict raises expectations of improved Middle Eastern supply conditions, adding downward pressure to crude prices.

·         The return of the global oil market to surplus contrasts with historically low commercial inventories, leaving prices vulnerable to further shifts in supply expectations.

Technical Outlook

·         Daily Bias: Bearish

·         Support: 92.00

·         Resistance: 104.11

British Pound / US Dollar (GBP/USD)

Key Takeaways

·         Expectations of a BoE rate increase to 4% provide support for sterling, although the extent of further tightening remains uncertain.

·         Markets are anticipating further rate increases next year, creating scope for sterling to react to any change in the BoE's policy guidance.

Technical Outlook

·         Daily Bias: Bullish

·         Support: 1.33960

·         Resistance: 1.35034

Calendar Watch 

·         BoE Interest Rate Decision: The BoE is widely expected to raise interest rates from 3.75% to 4%, marking its first increase since August 2023. Markets will focus on the voting split and policy guidance for clues about the pace of further tightening.

·         Initial Jobless Claims: Weekly unemployment claims will provide further insight into labour-market conditions ahead of Friday's Nonfarm Payrolls report, potentially influencing expectations for the Fed's December rate decision.

·         Fed Hammack and Fed Barkin Speeches: Investors will monitor their remarks for further insights into policymakers' views on inflation, employment conditions, and the future path of interest rates.

·         European Central Bank (ECB) President Lagarde Speech: Markets will look for signals on the Eurozone's inflation outlook, economic conditions, and the ECB's monetary policy direction.

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