Post-midterm US Dollar weakness supports Euro gains

• Democrats’ congressional win triggers US Dollar selling, keeping EUR/USD in positive territory.
• Firm US jobs and services figures help the Greenback recoup part of its losses.
• December rate increases remain the market expectation for both the Fed and ECB.

EUR/USD is up 0.35% on the day. The pair trades near 1.1235 at the time of writing, retaining gains on Wednesday as the US midterm election results weigh broadly on the US Dollar (USD). It has, however, retreated from the session high of 1.1273, with robust US economic figures helping the Greenback claw back some losses.

Control of both houses of Congress has passed to the Democrats. The resulting increase in the risk of political deadlock in Washington has prompted heavy US Dollar selling. At around 101.45, the US Dollar Index (DXY) is down 0.40% on the day. The gauge, which measures the Greenback against a basket of six major currencies, has rebounded from a session low of 101.21, its lowest reading since 30 September.

West Texas Intermediate (WTI) is trading near $87 a barrel, a daily decline of 9%, as oil prices tumble. Traders speculate that Congress, under Democratic control, could curb funding for Trump’s military campaign against Iran and step up pressure to bring the conflict to an end.

Lower energy import costs could provide the Eurozone economy with some relief as oil becomes cheaper. Falling oil prices could also temper inflation pressures worldwide. Yet uncertainty persists without a clear route to a negotiated end to the conflict, leaving oil exposed to sharp price swings.

October private-sector employment rose by 86K, according to ADP, exceeding the 69K forecast. September’s increase was revised lower, from 90K to 86K. In services, the ISM Purchasing Managers Index (PMI) slipped from 54.9 to 54.5. That was marginally below the 54.8 forecast, although it continued to signal expansion.

An 80% probability of another December rate increase is priced into markets, according to the CME FedWatch Tool. The figures give the Federal Reserve (Fed) scope to retain its hawkish position as policymakers seek to return inflation to the central bank’s 2% target. Next on the US calendar are weekly Initial Jobless Claims on Thursday, followed by Nonfarm Payrolls (NFP) on Friday.

Eurozone headline inflation accelerated from 3.8% to 4.0% YoY in October, while the core measure remained at 2.5%. Both readings exceed the European Central Bank’s (ECB) 2% target. The preliminary figures, released earlier in the day, leave a December ECB rate increase on the table.

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.”