Market overview
FX markets are back on the move. Political upheaval, shifting interest rate expectations and renewed volatility across global equities have injected fresh energy into currency trading. Sterling, the euro and higher-risk currencies are finding renewed momentum as investors reassess growth prospects and the direction of monetary policy. With confidence in US economic dominance being tested, the balance of power across major currency pairs may be starting to shift.
The catalyst has been a decisive shift in Washington, where Democrats have secured control of both chambers of Congress following the US midterm elections. The result initially sent the dollar to a five-week low, pushed Treasury yields lower and triggered a sharp sell-off in technology futures. Markets are now weighing the prospect of tighter constraints on President Trump's fiscal agenda, alongside potential scrutiny of the AI investment boom that has supported US growth. Although the initial reaction has moderated, political uncertainty has added another dimension to an already eventful week, with eurozone inflation, the Bank of England and US employment figures all competing for attention.
USD: Election results challenge dollar confidence
The dollar remains on the defensive after Democratic victories in traditionally Republican strongholds delivered a significant change in the US political landscape. A divided government raises the likelihood of legislative deadlock and limits the scope for further fiscal stimulus, weighing on Treasury yields and reducing some of the dollar's relative appeal.
Investors are also questioning whether greater political scrutiny of AI infrastructure and technology investment could undermine a key driver of US economic outperformance. However, with Trump signalling a willingness to cooperate with Congress and Treasury yields recovering from their lows, the initial selling pressure has eased.
Attention now turns towards Friday's US employment report. Stronger hiring could reinforce expectations of a December Federal Reserve rate increase and help the dollar regain its footing. Conversely, disappointing figures may extend recent weakness and encourage a broader reassessment of US growth prospects.
GBP: Sterling holds firm ahead of the BoE
Sterling continues to demonstrate resilience, supported by relatively robust domestic economic conditions and expectations that the Bank of England will maintain its restrictive monetary policy stance. GBP/EUR remains close to 17-month highs, although the 1.20 level continues to prove a difficult barrier to overcome.
Thursday's anticipated interest rate increase to 4% should provide some reassurance, but with further tightening already reflected in market pricing, the decision may offer limited scope for additional sterling gains.
Against the dollar, the pound has benefited from the US election fallout, with GBP/USD moving above its 200-day moving average around 1.3420 to reach a one-month high. However, further progress towards 1.35 could prove challenging, particularly if Friday's US jobs figures revive demand for the greenback.
EUR: Euro recovery gathers pace as ECB expectations strengthen
The euro is showing encouraging signs of recovery, with EUR/USD approaching 1.1250 following a break above its 21-day moving average for the first time since September. While the move has largely been driven by dollar weakness, improving technical momentum suggests the recent selling pressure may be losing strength.
Expectations of further European Central Bank tightening are also offering support. Bundesbank President Joachim Nagel's indication that a December rate increase is highly likely has reinforced the market's focus on persistent inflationary pressures.
Today's eurozone inflation release, with annual price growth forecast to reach 4%, could provide another boost if the figures strengthen expectations of further tightening. Nevertheless, ongoing French fiscal concerns and subdued regional growth remain obstacles, while EUR/USD must reclaim its 100-day moving average before a more sustained recovery can be established.
Looking ahead
Wednesday: Eurozone flash inflation figures could influence expectations for the ECB's December meeting and determine whether EUR/USD can break above 1.1250.
Thursday: The Bank of England is expected to raise Bank Rate to 4%, with attention focused on the Monetary Policy Committee's guidance and the outlook for further tightening.
Friday: US non-farm payrolls will be a critical test for the dollar. Strong employment figures could revive December Fed rate hike expectations, while weaker data may extend the dollar's recent decline.