The US midterm elections take place today and the USD remains on the back foot as investors position cautiously ahead of the vote. With US government borrowing costs near multi-decade highs, markets will be watching closely for what the results mean for US government spending and the Dollar.
All 435 House seats and 35 of the 100 Senate seats are up for grabs. Polls and prediction markets point to Democrats winning the House (around 85-95% odds), while the Senate is closer, with Democrats favoured at roughly 65-75%. According to the latest odds from Polymarket, a Democratic sweep (i.e. winning both the House and Senate) is being priced in around 71.5%, with a Democratic House and Republican Senate only around 22.5%. Polls will start closing overnight tonight and we should get a feel for the likely outcome during the Asian trading hours tomorrow.
No one can predict exactly how the different scenarios could play out on the USD, but here’s a rough summary of what we might expect:
Democratic sweep (the most likely outcome): A Democratic Congress could limit President Trump’s spending plans and put his tariff powers under greater scrutiny, which would likely ease fiscal concerns and potentially pull Treasury yields and the USD slightly lower. However, given that the Dollar has already lost ground this past week, it appears that a lot of this might already be priced in and therefore any reaction may be fairly contained.
Democratic House, Republican Senate: The fiscal policy implications would look much like a Democratic sweep, with Congress limited to must-pass items such as the federal budget and debt ceiling, which could trigger government shutdowns if agreements aren't reached. The USD reaction could potentially be more negative though, as this outcome is less priced in than a clean sweep. Furthermore, a Republican Senate would make it easier for Trump to appoint Fed members who favour lower interest rates (i.e. making the USD less attractive) and it could revive concerns over the Fed's independence.
Republicans retain both chambers (the least likely outcome): This would be a major surprise. It would likely mean more government spending, possible tax cuts, wider deficits and higher US interest rates, despite Trump being able to confirm a new nominee to the Fed (as above). Therefore, you would expect a USD rally on election night if this was the case but not necessarily a sustained one.
Delayed or contested results: A close race could delay a clear result and the increased US political uncertainty could favour safe havens such as the Swiss franc, Japanese yen and gold over the USD.
Overall, it’s important to note that historically the impact of midterms on currencies has been short-lived and the bigger picture drivers usually retake the focus quickly. Ultimately, oil prices (which remain closely tied to the Iran war), the Fed’s interest rate path and the resulting moves in Treasury yields are likely to be bigger drivers for the USD than the midterm results. Looking further ahead, if we do see a Democratic sweep, the real fiscal test for Congress would be the negotiations over the debt ceiling which aren’t expected until 2027.
As a result, the GBP/USD trades close to the higher end of the past 7 weeks. The GBP/EUR remains very buoyant having hit a fresh 17-mth high late on Friday.