Largest turnout in a generation expected

The U.S. midterm elections, which take place today, are receiving unprecedented coverage in U.S. and global media. The turnout is expected to be the largest in twenty-five years as the issues facing voters divide them in an almost unprecedented manner. President Trump’s approval rating has remained constant at around 42% as he has attempted to deliver on his election promises.

While the elections are being billed as a vote of confidence in Trump’s performance, the President himself has barely shown anything other than confidence in the results providing him with an overwhelming endorsement.

Opinion polls show that the House of Representatives, where every seat is “up for grabs” will be taken by the Democrats while the Senate will remain in the hand of the Republicans. There is little doubt this will “clip the President’s wings” somewhat and several clashes are likely. In that case, the dollar may fall initially but in the long term, the growing U.S. economy and the widening interest rate differential will provide support.

Apart from the election, the FOMC will meet this week and while not raising rates at this meeting, Chairman Powell will continue to provide a hawkish view on the rates and a positive spin of the performance of the economy. If he provides advance guidance of a hike at December’s meeting, the dollar index may reach and surpass its previous high for the year provided that the elections do not deliver a major shock.

Yesterday, the dollar index closed at 96.35 just nine pips lower than its opening.

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Official Brexit silence a sign of an imminent breakthrough?

Since the failure of Brexit negotiations to reach an agreement immediately before the recent EU summit both sides see the time for prevarication as having passed. We no longer see the “blame game” being played as London and Brussels face the reality of a no deal Brexit.

It was rumoured yesterday that we are approaching an unofficial line in the sand drawn by Mrs. May at which point negotiations will be deemed as having failed and no deal Brexit plans need to start being put in place. If is not certain whether that day is November 21st, the day by which Brexit Secretary Dominic Raab said a deal was hopefully going to be agreed.

There has been a singular lack of official comment recently which the market has taken as a positive sign, and has seen further short positions in Sterling liquidated producing a rally versus the dollar that reached a high of 1.3066 yesterday.

The outlook for the UK economy is dominated by Brexit. Recent purchasing managers indexes for construction and services betrayed its confused state. Construction activity rose, and services fell. Both sectors are dominated by Brexit, with a concern over a lack of workers arriving from the EU to take up the slack in the construction industry, while UK firms’ ability to do business in Europe post-Brexit is still up for discussion.

Italian Budget a test case for greater integration

As the market awaits next week’s deadline on Brussels demand that Rome present a 2019 budget that creates a deficit closer to the 0.6% that had been agreed with the previous Government and Rome insists on its “Budget for Italy”, the wider picture is being considered.

It is seen as imperative for the future integration of the economies of the nineteen Eurozone members that Brussels prevails if further pockets of anti-austerity Nationalist fervour are to not spring up. The progression of the eurozone must continue with fiscal integration the next objective.

While the further social integration of the wider EU itself has political supporters in Merkel and Macron (neither of whose stars are particularly in the ascendant), the integration of the Eurozone is more in the hands of bureaucrats although it will eventually need Government approval. It is difficult to say whether political uncertainty or bureaucratic malaise is the greater threat.

The single currency is clearly marking time ahead of next week’s deadline, reaching 1.1424 yesterday, versus the dollar, closing at 1.1407.

As long as the ECB and Federal reserve are heading in different directions as far as monetary policy and short-term interest rates are concerned, the euro will remain under pressure no matter the political backdrop on either side of the Atlantic Ocean.