USD: A preview for 2027?
The Democrats have delivered on opinion polls and have won both the House and the Senate. And by large margins. They have also won governorship races in key states like Texas. Investors will be parsing what this all means. For example, Gina Hinojosa won the Texas governor's race on a ticket of wanting an immediate moratorium on data centre buildouts. And it looks like Abdul El-Sayed is going to win the Michigan Senate seat on quite a progressive ticket. Will the Democrat agenda be pulled to the left on a national basis?
Given AI's role in powering the US economy, speculation over whether a new Democrat Congress would slow AI capex plans briefly hit markets. The chip exporter-heavy stock markets of Korea and Taiwan were briefly down 3-4% overnight on news of the blue wave, but have since recouped all those losses. We've seen the same in US rates and FX markets, where US two-year yields have reclaimed most of their 8-9bp drop and the likes of USD/CHF and USD/JPY have reversed around half of their 1% fall in early Asia.
That the initial market moves are being reversed probably owes to the fact that the Democrats do not take office until January. Also, one wild-card risk removed from the dollar's downside has been President Trump accepting these results. However, overnight price action could provide a preview for markets in 2027. We had felt that a Democrat Congress would be a mild dollar negative – both in terms of what it would mean for the AI story and the prospect of a prolonged US government shutdown potentially from next summer.
Before then, however, investors are faced with a strong US economy and a Fed ready to tighten further. US labour market data has come in on the strong side so far this week. Fresh insights will be seen today in the release of the monthly ADP figure and the employment component in the October ISM services.
Also in focus today will be the 1330CET release of the US Treasury's quarterly refunding plans. Views are that the Treasury will continue to try cutting long-end supply. Let's see whether the short-end can handle all the new issuance. Any upset in the bond market would hit USD/CHF as it did in August after Scott Bessent's adjustments to Treasury buyback strategy.
As above, we would not chase the dollar lower today for what, after all, could be a 2027 story. Instead, the dollar looks likely to be traded through the macro/monetary lens, which remains supportive.
The overnight DXY low of 101.25 looks to be an important support level which may hold into tomorrow's October jobs report.
EUR: Focus on core CPI today
EUR/USD is correcting off an overnight spike to 1.1260. Expect it to take its cue from tech stocks today, where any renewed pressure could drag it higher. For now, however, we do see the 1.1260/70 area being the top of a near-term trading range.
In focus today will be the eurozone flash CPI for October. Energy prices are expected to drive the headline to 4.0% year-on-year, while core is expected to steady at 2.5%. Any upside surprise in core should be euro bullish, where short-dated euro swap rates will rise on the view that the ECB needs to deliver more than just insurance rate hikes.
In Sweden, the Riksbank is widely expected to hike rates by 25bp to 2.0% this morning. This is also our call, as discussed in our preview. In an interim meeting like this, there are no new projections and the statement will set the tone. We think the tightening bias will remain in place, keeping front-end rates supported. We currently expect a hold in December and another hike in February.
Markets are fully pricing in a hike today and we don't expect a major impact on SEK as current expectations for further tightening may be broadly validated for now. We have a year-end target of 11.00 for EUR/SEK.
CHF: In demand
EUR/CHF briefly traded sharply lower yesterday on the back of a surprisingly high October inflation print of 1.5% year-on-year. That raises questions about whether the Swiss National Bank can avoid tightening throughout the whole of 2027, which sources had claimed. We should hear a little more on this from SNB's Martin Schlegel tomorrow, who speaks at an SNB watchers conference.
A more hawkish SNB is quite a clean positive for the Swiss franc. Traders will remember 2023, when the SNB actively drove the franc stronger and sold FX as part of its tightening toolkit. Expect to see even more interest in the Swiss franc over the coming months, with downside risks to EUR/CHF forecasts.
CEE: The relief could continue a bit longer
The US midterm election results point to a scenario that is already well-priced, with limited implications for the EM and CEE regions at this stage. A weaker US dollar and lower 10-year Treasury yields should further support the general sense of relief seen in recent days, driven by headlines regarding US-Iran negotiations and lower energy prices. While the future trajectory of the conflict remains unclear following the midterms, the market currently signals a continuation of this relief. This should help push CEE rates lower and ease pressure on regional currencies.
In the Czech Republic, October inflation data will be released; we expect a slight uptick from 2.5% to 2.6% year-on-year, with core inflation continuing its upward trend. We anticipate that the CNB will hike interest rates tomorrow and present a new forecast. Barring any major surprises, today’s inflation figures are unlikely to significantly alter the outlook. Consequently, the EUR/CZK pair should remain within the 24.300–24.350 range.
In Poland, the National Bank of Poland is expected to keep interest rates unchanged at 3.75% today and will present a new forecast. Greater attention should be paid to tomorrow’s press conference, which is expected to provide further forward guidance. While some political relief yesterday may have reduced pressure on the zloty, our overall outlook remains bearish due to the NBP’s dovish stance. Given that a significant portion of rate hikes – roughly 75bp – has already been priced in, the EUR/PLN pair could stabilise within the 4.410-4.420 range.
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