Forex Today: USD remains under pressure after election as BoE rate decision takes centre stage

Thursday, 5 November: the key market developments to watch

With the USD Index slipping further towards 101.00 in early European trading on Thursday, selling continues to weigh on the US Dollar (USD) in the wake of the midterm election result. Attention later turns to the Bank of England (BoE), which will announce its monetary policy decisions. At a press conference beginning at 12:30 GMT, Bank of England (BoE) Governor Andrew Bailey will discuss the policy outlook and take questions.

Against its major counterparts, the USD lost ground midweek after the Democrats secured a majority in both the Senate and the House. Renewed hopes of an easing in the Middle East conflict sent Crude Oil prices sharply lower, while Wall Street's leading indices rallied after the opening bell as risk appetite improved. On the data front, Automatic Data Processing (ADP) reported an 86K rise in private-sector employment in October, exceeding market forecasts of 69K. The Institute for Supply Management's (ISM) Services Purchasing Managers' Index (PMI), meanwhile, came in at 54.5, signalling a healthy pace of expansion in service-sector activity.

Recent political and market developments provide the context for the latest spell of Dollar weakness across the G10, which Scotiabank analysts describe as “something of a ‘relief rally’”. They also see the movement as “a shift in the USD toward the middle of its ‘smile’, in which relative growth and interest rate differentials narrow as the US/USD drift from the edge linked to exceptionalism – with the other edge of the smile tied to sentiment-driven risk aversion.” As immediate tail risks diminish, higher-beta currencies have been able to outperform; in the analysts' view, the move away from the extremes of the so-called Dollar smile helps account for that performance.

GBP/USD reached its strongest level since mid-September, just above 1.3500, after advancing nearly 0.4% on Wednesday. Thursday's European morning finds the pair consolidating near 1.3480. A 25 basis points (bps) increase in the BoE's policy rate to 4% is expected by investors.

A less forceful message from the BoE could undermine Sterling's recent resilience, warns Societe Generale’s Kit Juckes. In his assessment, “if the Bank of England’s guidance on Thursday shows any hesitation about how much further they need to go, the Pound could start looking vulnerable,” although he also believes “it is probably too early for them to give the appearance of slowing down.”

Gold (XAU/USD) rose more than 3% on Wednesday as it reacted favourably to the US midterm election outcome. That upward momentum has continued into Thursday, with XAU/USD trading above $4,100 and gaining about 1.5% during the European morning.

EUR/USD is trading higher near 1.1250 on Thursday, supported by widespread USD weakness. September's Producer Price Index figures are due on the European economic calendar later in the day. European Central Bank President Christine Lagarde is also scheduled to join a discussion at the "New Dialogues for the Future" event in Milan, Italy.

USD/JPY is edging further down towards 158.00 in the European session, extending Wednesday's slight decline. Investors will be closely monitoring Japan's September Labour Cash Earnings figures, due in the opening hours of Friday's Asian session.