GBP/USD Exchange Rate Strengthens After Democrat Gains in US Midterm Elections
After the Democrats won control of the House of Representatives in the US midterm elections the US Dollar (USD) came under renewed pressure.
Although the Republicans held onto the Senate the result still means that political gridlock is likely in the months ahead, with the House now free to oppose Trump administration policies.
This reduces the chances of further tax cuts and increased spending to boost US growth, although the risks of a further escalation of trade tensions with China remain.
As Jan von Gerich, Global Fixed Income Strategist for Nordea Markets, commented:
‘Frustration on the domestic front will probably also push Trump to focus more on foreign and trade policies. This could mean a tougher stance on trade negotiations, more tariffs and further escalation of the trade war. The trade war could broaden from being primarily a conflict between the US and China to cover other areas such as the EU as well.’
Even so, if the House reins in the Trump administration’s fiscal ambitions this could encourage the Federal Reserve to engage in a slower pace of policy tightening.
While markets remain confident in the likelihood of a December interest rate hike the prospect of a less hawkish Fed outlook weighed on USD exchange rates on Wednesday morning.
Pound Sterling (GBP) Gains Little Encouragement from Muted UK Housing Market
A better-than-expected Halifax house price index offered limited support to Pound Sterling (GBP), meanwhile, as the UK housing market continues to show signs of softness.
While price growth saw a moderate rebound on the month in October this was not enough to encourage particular confidence in the outlook of the wider economy.
As forecasts point towards another month of contraction from the RICS house price balance this suggests that the housing market remains in a relatively sluggish state.
However, the Pound Sterling to US Dollar (GBP/USD) exchange rate could find a fresh rallying point ahead of the weekend if the third quarter UK gross domestic product proves positive.
If growth shows an acceleration on the quarter this may encourage the Pound to strengthen across the board.
Even though Brexit-based uncertainty continues to hang over the domestic outlook a stronger showing here could give GBP exchange rates a boost.
Hawkish Fed Signal to Support US Dollar (USD) Exchange Rates
Demand for the US Dollar could pick back up, meanwhile, in the wake of the Federal Open Market Committee’s (FOMC) November policy announcement.
As long as Fed policymakers signal that a December interest rate hike remains on the cards this should offer USD exchange rates a leg up.
With the impact of a December rate hike already largely priced into the US Dollar, though, the negative impact on the GBP/USD exchange rate could prove limited.
On the other hand, any signs of increased caution within the central bank could encourage fresh US Dollar selling on Thursday evening.
Political developments are also likely to remain a source of US Dollar bearishness for some time to come as the dust from the midterms settles.