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US midterms set to usher in two years of gridlock

capitol hill

The sharp decline in the US dollar we saw on Friday continued yesterday as the greenback lost ground across the board, with the pound benefitting the most, pushing above the 1.1500 area, as markets looked ahead to this week’s Q3 GDP number, and next week’s autumn budget.

The weakness in the US dollar came despite a continued rise in US yields, while US markets also posted another strong session, as the US mid-term elections get underway later today. With the polls in the US pointing to the Republicans winning at least one of the US legislatures, which would be a catalyst for the political gridlock over the next two years and thus stymieing the ability of politicians to pass any legislation that could impact negatively on business.

European markets underwent a mixed session with the FTSE100 losing ground due to weakness in the more defensive areas of the market, while the DAX continued its recent resilient run, closing at a two-month high, and nudging up against the 200-day SMA.

Oil prices, which initially edged above $100 a barrel soon found the air rather thin above that level, closing lower as the optimism over a possible China reopening gave way to the reality that any prospect of that was likely to be months away. The latest China trade data also pointed to a weak economy, although oil imports showed strong gains in October. This by itself shouldn’t have come as too much of a surprise given that winter is coming and China would probably want to look at building up its winter storage capacity.

Despite the strong US finish yesterday, markets here in Europe look set to open in the same fashion they ended yesterday, mixed.  

The resilience being displayed by stock markets in recent weeks appears to be driven more in hope than expectation that US core prices could be on the cusp of peaking. The headline numbers have already started to slide in recent months, with the recent strength of the US dollar also likely to help bring prices down in the medium term.

The euro also managed to recover above parity after first French central bank governor Francois Villeroy de Galhau said the ECB should continue to raise rates until inflation has shown signs of peaking.

He was then followed by Latvian central bank governor Martins Kazaks that further rate rises were needed and that no pause was necessary. With headline CPI already at 22.2%, and the October numbers due out today, Kazaks certainly has reason to complain about the ECB’s ultra-loose monetary policy.

EUR/USD – pushed above the highs last week at 0.9975 and looks set for a retest of the 1.0090 area and October peaks. Above that we have the September highs of 1.0200. Support comes in at the 50-day SMA.   

GBP/USD – looking set for a retest of the trend line resistance from the highs this year at 1.1540 with a break targeting a move towards the October peaks at 1.1640, with further resistance at the September peaks at 1.1710.   

EUR/GBP – failed at resistance between 0.8780/90 area, yesterday, with support at the 0.8670 area. A break either side targets the next move higher or lower. A break of 0.8800 retargets the October peaks at 0.8860 area.

USD/JPY – slipping back towards the 50-day SMA with the bias for further gains starting to diminish. The inability of the US dollar to get close to a retest of the 150 area has seen some weakness in the short term, which could see a retest of the recent lows at 145.10.

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