Euro retains gains as US Dollar softens after midterm elections

• EUR/USD retains gains as US Dollar comes under selling pressure after Democrats’ congressional win.
• Robust US employment and services figures underpin a partial recovery in the Greenback.
• December interest rate rises remain the market expectation for both the Fed and ECB.

Resilient US economic figures have helped the US Dollar (USD) recoup some losses on Wednesday, pulling EUR/USD back from its intraday peak of 1.1273. Nevertheless, broad-based Dollar weakness following the US midterm election results continues to support the pair. EUR/USD stands at around 1.1235 at the time of writing, a gain of 0.35% on the day.

Heavy selling has hit the US Dollar after Democrats secured both houses of Congress, heightening the risk of political deadlock in Washington. Against a basket of six major currencies, the US Dollar Index (DXY) is trading near 101.45, a daily decline of 0.40%. That marks a recovery from its intraday trough of 101.21, the lowest reading since 30 September.

Oil prices, meanwhile, have dropped steeply amid speculation that a Congress controlled by Democrats could curb funding for Trump’s military campaign against Iran and step up pressure to bring the conflict to an end. At around $87 a barrel, West Texas Intermediate (WTI) is down 9% on the day.

Lower energy import bills could provide some respite for the Eurozone economy if oil remains cheaper, while reduced oil prices could also temper global inflationary pressures. Yet uncertainty persists in the absence of a clear route to a negotiated end to the conflict, leaving oil prices exposed to pronounced swings.

October private-sector employment rose by 86K, according to the ADP report, exceeding the 69K forecast. September’s increase, however, was revised down from 90K to 86K. The ISM Services Purchasing Managers Index (PMI) slipped from 54.9 to 54.5, just below expectations of 54.8, although the reading continued to signal expansion.

With policymakers seeking to return inflation to the central bank’s 2% target, these figures give the Federal Reserve (Fed) scope to retain its hawkish stance. According to the CME FedWatch Tool, markets assign an 80% probability to a further rate rise in December. The next releases in focus are Thursday’s weekly US Initial Jobless Claims and Friday’s Nonfarm Payrolls (NFP).

A December interest rate rise by the European Central Bank (ECB) remains a possibility following the Eurozone’s preliminary October inflation figures, published earlier in the day. Annual headline inflation increased from 3.8% to 4.0% YoY, while the core measure was unchanged at 2.5%. Both readings therefore remained above the ECB’s 2% target.

Speaking on Tuesday, ECB policymaker Klaas Knot cautioned that “core inflation, second-round effects will likely pick up,” and said the central bank “may have to approach [the] 2% goal more often from above.”