Dollar-yen is expected to trade nervously next week in response to the outcome of the US midterm elections and movements in long-term US interest rates. The dollar's focus will be the balance of power in Congress and fiscal policy, while euro-dollar is likely to be affected by expanding protests and expectations for an ECB rate hike.
For the week of 2 November, dollar-yen is expected to trade nervously in response to the outcome of the US midterm elections and movements in long-term US interest rates, with both the House and Senate currently narrowly divided. The market reaction is likely to depend on whether the Democrats retake the House or secure majorities in both chambers.
The main scenarios include a divided government, in which concerns over policy gridlock would weigh on the dollar, and a blue wave, in which progress on tariffs, healthcare and limits on executive authority could diminish the dollar's upward momentum. Concerns over a possible escalation of clashes regarding an increase in the federal debt ceiling and budget proposals could also prompt risk-off dollar selling. Speculation emerged on 4 November that the 20-year Treasury bond could be discontinued entirely at the US quarterly Treasury auction. If this occurs, dollar-yen could rise as selling pressure on US Treasuries pushes up US interest rates.
Euro-dollar is expected to be buffeted by fluctuations in the dollar amid expanding protests, while its direction could change significantly depending on the outcome of the US midterm elections. If a divided government or blue wave raises concerns about political gridlock and fiscal risks in the United States, easing upward pressure on the dollar, euro-dollar could remain firm. On the other hand, concerns over tariff policy and rising commodity prices caused by geopolitical risks could weigh on the euro-area economy. With expectations emerging for an ECB rate hike at its December meeting, attention is focused on the euro-area consumer price index for October.
Looking back at the week of 26 October, dollar-yen rose to ¥158.35 on reports concerning crude oil prices but struggled to extend its gains after the FOMC meeting. Euro-dollar fell to $1.1105 after the ECB meeting was reported to have left interest rates unchanged, then recovered to $1.1192 on expectations for a rate hike at the December meeting.