US Midterm Elections Loom as Dollar Hovers Near One-Month Low

Currency markets remained rangebound ahead of Tuesday's United States (US) midterm elections, while diplomatic developments involving Iran drove volatility in oil prices and kept geopolitical risks in focus. 

Market Wrap-Up: Oil Rebounds, Gold Recovers, and Dollar Faces Conflicting Pressures

The US dollar traded slightly weaker on Tuesday after falling to a one-month low in the previous session, while oil prices rebounded in early Asian trading following a report of a US strike on Iran's Qeshm Island. Markets continued to assess the prospects of diplomatic progress between Washington and Tehran alongside renewed concerns over Middle East supply disruptions.

The US Dollar Index (DXY) last traded at 101.76, marginally lower after declining to its weakest level in a month on Monday. The euro edged higher to USD 1.1185, while the Japanese yen remained flat at 157.915 per US dollar during a local holiday. Sterling gained 0.05% to USD 1.3414 following stronger United Kingdom (UK) manufacturing activity data.

Oil prices recovered in early Asian trading after the Wall Street Journal reported, citing US officials, that the US had struck Iran's Qeshm Island. Brent crude futures rose 48 cents, or 0.5%, to USD 105.25 a barrel, while West Texas Intermediate (WTI) gained 47 cents, or 0.5%, to USD 96.93 a barrel.

The rebound followed a sharp decline on Monday, when Brent settled at USD 104.77 a barrel, down USD 8.66, or 7.63%. Earlier hopes for diplomatic progress between the US and Iran had weighed on oil prices after Tehran said discussions aimed at ending the eight-month conflict were continuing. The Wall Street Journal's report of a US strike, however, renewed concerns about a potential escalation and prolonged disruptions to Middle East energy supplies.

The sharp decline in oil prices on Monday helped ease inflation concerns, contributing to lower yields on longer-dated US Treasuries. The US 10-year Treasury yield was steady at 4.9145%, while the 30-year yield held at 5.2868%. Both had fallen to their lowest levels in nearly two months during the previous session.

Meanwhile, gold recovered more than 2% from a one-year low on Monday as softer oil prices eased inflation concerns and supported the precious metal. Spot gold climbed 2.1% to USD 3,954.41 an ounce, while US gold futures for December delivery settled 1.8% higher at USD 3,969.60. Spot silver also advanced 3.1% to USD 50.64 an ounce.

In monetary policy, attention turned to the Reserve Bank of Australia's (RBA) interest-rate decision on Tuesday. Markets expected the central bank to raise its official cash rate by 25 basis points to 4.85%, which would mark its fifth increase this year and bring cumulative tightening to 125 basis points. The Australian dollar was little changed at USD 0.7002 ahead of the announcement.

The US dollar continued to face competing influences, with softer oil prices weighing on Treasury yields, while concerns over artificial intelligence (AI)-related stocks and uncertainty surrounding the US midterm elections provided some safe-haven support. Stronger US manufacturing activity in October further complicated the inflation outlook. The Institute for Supply Management's (ISM) Manufacturing Purchasing Managers' Index (PMI) increased to 55.5 from 54.5 in September, exceeding economists' expectations that it would remain unchanged.

However, the survey's input prices index remained elevated at 75.2, despite easing from 77.9 in September, while the supplier deliveries index continued to indicate longer delivery times. These figures reinforced concerns that persistent cost pressures could complicate the Federal Reserve's (Fed) monetary policy outlook. 

Markets will now monitor the Job Openings and Labor Turnover Survey (JOLTS), Factory Orders, and the midterm elections for further indications of economic conditions and potential implications for monetary policy and broader market sentiment. 

DXY

Key Takeaways

·         Dollar weakness remains in focus, with lower energy prices easing inflation expectations and putting downward pressure on longer-dated US Treasury yields.

·         AI-related equity weakness and US midterm election uncertainty continue to provide offsetting safe-haven support for the greenback.

Technical Outlook

·         Daily Bias: Bearish

·         Support: 101.42

·         Resistance: 102.09

Gold / US Dollar (XAU/USD) 

Key Takeaways

·         Gold's recovery was supported by easing inflation concerns following the retreat in oil prices, although expectations of further Fed tightening remain a headwind.

·         US midterm election uncertainty keeps fiscal policy and the longer-term US debt outlook in focus for precious metals.

Technical Outlook

·         Daily Bias: Bullish

·         Support: 3,870

·         Resistance: 3,970

Brent Contract for Difference (CFD)

Key Takeaways

·         Renewed military escalation risks are challenging the market's earlier optimism over a potential US-Iran diplomatic breakthrough.

·         The risk premium remains sensitive to developments around the Strait of Hormuz and the possibility of prolonged supply disruptions.

Technical Outlook

·         Daily Bias: Bearish

·         Support: 102.67

·         Resistance: 108.42

Australian Dollar / US Dollar (AUD/USD)

Key Takeaways

·         The RBA's anticipated 25-basis-point rate increase could strengthen the Australian dollar's yield appeal, with the policy outlook remaining central to its near-term direction.

·         Broader US dollar weakness offers additional support to AUD/USD, although the market's reaction will depend on the RBA's policy decision.

Technical Outlook

·         Daily Bias: Bearish

·         Support: 0.69882

·         Resistance: 0.70215

Calendar Watch 

·         JOLTS: Markets will monitor labour demand for further signals on US employment conditions and potential implications for the Federal Reserve's interest-rate outlook.

·         Factory Orders (Month-on-Month): Investors will assess changes in manufacturing demand for insights into US business activity and economic growth.

·         US Midterm Elections: Markets will watch the election results for potential implications for US fiscal policy, government spending, and broader investor sentiment.

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