US Dollar May Turn Higher as Markets Digest Midterms Outcome

TALKING POINTS – US DOLLAR, MIDTERM ELECTIONS, YEN, AUSTRALIAN DOLLAR

• US Dollar cautiously lower as midterm election outcome matches forecasts
• Yen higher, commodity FX down with APAC stocks on fiscal gridlock fears
• Bets on inflationary infrastructure plan may boost USD, cap JPY advance

The outcome of the US midterm elections proved to be squarely in line with baseline expectations. Democrats took control of the House of Representatives while Republicans successfully defended (and narrowly expanded) their majority in the Senate.

The response from currency markets was relatively timid. The US Dollar edged a bit lower, which probably reflected a sense of worry about acrimonious deadlock on the fiscal policy front now that bipartisan support is a must-have to pass legislation.

The somewhat uneasy mood was echoed as late-day selling on Asia Pacific stock exchanges that brought most regional bourses into negative territory, erasing earlier gains. The anti-risk Yen rose while the sentiment-geared Australian, Canadian and New Zealand Dollars weakened against this backdrop.

US DOLLAR MAY TURN HIGHER AS MARKETS DIGEST MIDTERMS

The Greenback may move to the offensive as the day progresses. The new legislative landscape leaves an infrastructure spending plan as a rare point of agreement between the newly-empowered Democrats and the Trump administration. Today’s outcome may put that at the front of everyone’s agenda.

An increase in government spending is likely to boost economic growth and inflation, pushing the Federal Reserve to accelerate its already ambitious interest rate hike cycle. Speculation about such an outcome may send the US unit higher as well as buoy risk appetite, pushing the Yen back downward.

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** All times listed in GMT. See the full economic calendar here.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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