British Pound approaches 1.3500 against US Dollar as Trump suffers defeat in US midterms

• A 0.5% advance on Wednesday takes GBP/USD above 1.3480 to new seven-week highs.
• News of a Democratic victory in the US midterm elections prompted broad-based selling of the US Dollar.
• Expectations that the BoE will raise interest rates on Thursday have supported the Pound in recent days.

A 0.5% gain so far on Wednesday has taken GBP/USD to seven-week highs above 0.3480 at the time of writing. The British Pound (GBP) extended its advance against the weakening US Dollar (USD) after news that the Democrats had secured control of both the House and the Senate in Tuesday’s US midterm elections.

The US results confirmed emphatic opposition to President Donald Trump’s policies, extending even to Republican strongholds governed by the party for decades, including Kansas, Ohio, North Carolina and Texas.

As soon as the first results pointed to a Democratic victory, the US Dollar fell against currencies across the board. Fears that Democrats would impose stricter regulation on the AI sector and curb data centre expansion prompted a sell-off in AI-related shares, alongside a flight to the safety of government bonds.

According to analysts at Rabobank, markets initially interpreted Democratic control of Congress as pointing to “fewer fiscal giveaways and therefore less inflation,” adding that this combination “suggests lower yields on treasuries which have negative implications for the USD.” 

Pound finds support as markets prepare for Thursday’s BoE rate rise

In contrast, expectations of a quarter-point increase in the Bank of England’s (BoE) Bank Rate to 4.0% following Thursday’s monetary policy meeting have kept the Pound moderately supported in recent days.

The outlook beyond that meeting remains less certain. Recent remarks from BoE policymakers suggest that the monetary policy committee is divided over further tightening, while Governor Bailey has tended to downplay inflationary pressures. Should Thursday’s increase carry a dovish message, sterling bulls could be tempted to take profits, potentially prompting a substantial pullback.