US midterm elections: A 'more adverse' Dollar reaction and renewed fears over Fed independence?

Matthew Ryan, CFA Ebury

We think that the fiscal policy implications of this scenario are broadly similar to a Democratic sweep.

Congress would again be limited to approving must-pass items, such as the debt ceiling or the federal budget, with the latter potentially triggering government shutdowns if consensus is not reached.

This could create some market unease, along with a temporary slowdown in the US economy if the shutdowns were to drag on.

Under this scenario, we would expect a more adverse reaction in the dollar than in the case of a Democratic sweep, in part as this is not fully priced in. A Republican Senate would also make it easier for Trump to confirm nominees to the FOMC.

The appointment of members that more closely align with his preference for a lower Fed funds rate could both dampen expectations for higher US rates and amplify fears over Fed independence.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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