European markets opened higher on Wednesday and keep rising during the day as US midterm election results came in line with expectations. As opposition Democrats regained a majority in the House of Representatives, the prospect for further increase of the political uncertainty in the country is rising which could hurt investor confidence down the road. But at this stage, the markets are unaffected by election results. As such, Britain’s FTSE 100 adds 1.23 per cent to 7,126, France’s CAC 40 gains 1.40 per cent to 5,146, while German DAX 30 rises by 1.01 per cent to 11,600. US stock index futures point to a potentially upbeat start of the session with Dow Jones futures are rising by about 200 points ahead of the official open in Wall Street.
The greenback remains on the defensive and has been trading under a heavy selling pressure amid the election outcome as investors fear that the political gridlock could make it more difficult for Trump to proceed with his initiatives including further tax cuts and economic stimulus in general. Against this backdrop, there are some concerns that the Fed will slow down the process of monetary tightening down the road. By the way, the two-day FOMC meeting that concludes tomorrow could bring a relief to dollar bulls as the central bank may confirm its commitment to further tightening and prepare the markets for another rate hike in December. If so, the buck will recoup or trim losses in the days ahead as the dust after the election settles.
EURUSD faced a resistance at 1.15 and refrains from challenging this barrier so far. The euro’s rise is mostly due to dollar weakness and positive risk sentiment, while the economic picture in the euro area still leaves much to be desired. In particular, as the fresh report showed, retail sales failed to grow last month against the rise by 0.3% in August, while the YoY result came in at just 0.8% following an increase by 2.2% a month earlier. Should the pair fail to overcome the immediate resistance at 1.15 in the near term, the risk of a retreat will rise and the upside momentum in the European currency may lose some traction, especially amid the upcoming FED meeting.
USDJPY slipped from fresh one-month low of 113.80 reached in Asia and fell back below the 113.00 mark. The pair has partially recovered since then and settled around the psychological level waiting for further clues from the markets. Investor sentiment continues to drive the price, so the buck may have a chance for a corrective rebound should risk-off trades reemerge ahead of the FOMC meeting results and amid the potential signals about the growing political uncertainty in the world. Technically, USDJPY needs a clear break above the 113.40 intermediate resistance in order to retarget the 114.00 handle in the short term.
Brent crude has jumped higher after some attempts to test the $71.50 area earlier I the day. The price has regained two psychologically important levels and reached a six-day high of $73.52. Apart from a weaker dollar, the market gained support amid the reports that Russia and Saudi Arabia are going to start discussion on oil output cuts in 2019. Besides, as Bloomberg reported, OPEC+ countries expressed concerns about increase in oil inventories and want to discuss cut options in Abu Dhabi this weekend. All this means that crude oil prices will at least stay afloat in the days to come on building expectations for a production cut, so the downside risks are subsiding now, and the risk of Brent extending losses to $70 has abated substantially. Further price dynamics will depend on the OPEC+ rhetoric this weekend.
Nathan Lambert, Head of Global FX Analytical Department