FX Daily: Time to think about the midterms?
The desk is positioning for potential downside risks in the US dollar due to heightened political uncertainty leading up to the US midterms, alongside supportive developments from the ECB for the euro's strength. Per the full note , the ECB's clear message on a likely December rate hike strengthens the euro as it approaches today’s Q3 GDP release. Concurrently, algorithm-driven fluctuations in tech stocks and a 68% chance of a Democratic sweep may prompt a precautionary unwinding of USD long positions, exacerbating bearish sentiment. This backdrop comes with robust US economic data reinforcing Fed vigilance, maintaining pressure on dollar gains against broad market tentativeness.
What the desk is arguing
The desk cautions that the upcoming US midterms present significant downside risks for the dollar, especially as investor sentiment shifts. According to the commentary, the potential for a Democratic sweep is trading at approximately 68% in prediction markets, which could heighten concerns around government gridlock and its implications for fiscal policy.
Supporting this view is recent US data, including a Q3 growth rate of 3.4%—slightly above consensus—and core PCE at 0.3% MoM. This suggests that while the Fed remains hawkish, trader positioning heading into the elections may alter dollar dynamics ahead of the FOMC blackout period ending today.
Where it sits in our coverage
For the euro, our consensus currently stands at 1.1253, with a range forecast extending from 1.1162 to 1.2000 through December 2026. Specific firm targets include rabobank at 1.1800, investec at 1.1700, and cibc at 1.2200 by the same date.
This aligns with a wide-ranging consensus, where forecasts tend to hover around the mid to upper band of these targets, suggesting potential room for further euro appreciation depending on the outcome of the midterm elections.
How other firms see it
A majority of firms echo the desk's sentiment, with rabobank, rbc, and mizuho anticipating euro strength aligning with ECB policy. However, firms like citi and nomura remain cautious, projecting lower targets for EUR performance.
The anticipated trajectory of the EUR/USD could also intersect with the evolving stance of the Fed and its implications for USD/JPY dynamics, especially considering the ongoing qualitative shifts in AI sector sentiment impacting both markets.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Upcoming US midterm elections pose downside risks for the dollar.
- 02ECB signals likelihood of a December rate hike supporting euro strength.
- 03Precautionary unwinding of long USD positions seen ahead of elections.
- 04Strong US economic data complicates bullish USD outlook.
Market implications
Traders should remain vigilant around EUR/USD movements, particularly targeting levels above 1.13 in the wake of election outcomes. Additionally, the closely watched 3Q GDP report could pivot sentiment in the currency markets based on its reception by analysts.
Risks to this view
Any unexpected outcomes from the midterms, such as a Republican gain that stabilizes the dollar, could reverse bearish sentiment swiftly. Additionally, stronger-than-expected economic indicators or shifts in Fed policy could amplify dollar strength, countering current positioning.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Morgan Stanley | Bullish | 1.2150 |
StoneX | Bearish | 1.1000 |
Standard Chartered | Bullish | 1.1800 |
Articles FX Daily: Time to think about the midterms? Published 07:39 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The ECB sent a clear message yesterday: a December hike is likely. That is providing a more supportive backdrop for the euro ahead of today’s 3Q GDP release.
Meanwhile, resurgent AI-related jitters and the upcoming US midterms are increasing downside risks for the dollar, in our view, although a still-hawkish Fed argues against major corrections Frantisek Taborsky , Francesco Pesole and Chris Turner We see some precautionary unwinding of net-long positions ahead of Tuesday’s US midterm election as the main risk for the dollar today USD: Midterm positioning may start to kick in Fresh pressure on tech stocks has triggered some safe-haven buying in US Treasuries and weighed on the dollar as the front end followed lower. Moves are contained in both equities and FX, but it’s a reminder that the greenback still faces downside risks from oscillating AI sentiment. At the same time, whenever tech stocks don’t dominate headlines, the dollar has had no trouble attracting buyers, and we don’t think Wednesday’s FOMC changed that.
Incidentally, yesterday’s US data was hawkish-leaning, with 3Q growth slightly above consensus at 3.4% and core PCE at 0.3% month-on-month in September – enough to keep the Federal Reserve on high alert. To us, the main risk for the dollar today is some precautionary unwinding of net-long positions ahead of Tuesday’s US midterm elections. A Democratic sweep is trading around 68% in prediction markets, and that could be seen as slightly negative for the US dollar from a few angles, from higher risk of government shutdown and gridlock on debt ceiling negotiations to potential damage to already shaky AI-related sentiment.
We’d be cautious in chasing the USD upside in the next few days. Today marks the end of the FOMC’s blackout period, and we’ll hear from Thomas Barkin (neutral), Mary Daly (moderate dove) and Alberto Musalem (moderate hawk). But we don’t feel there is much members can add at this stage, as markets are already pricing in a December hike and dovish comments look unwarranted given the latest energy price developments.
Francesco Pesole EUR: ECB to keep tightening going The euro went on a small rollercoaster yesterday as the European Central Bank held rates. The statement initially came across as slightly dovish, with a reference to financial conditions weighing on inflation and growth. But President Christine Lagarde then delivered a few hawkish remarks in the press conference that propped up the euro.
Lagarde said a hike was discussed at the meeting and hinted that the direction of travel remains towards further tightening. She also gave no indication that French bonds are prompting any dovish rethink at the ECB. Finally, the customary tip to the media a few hours later indicated that officials are “ready” to raise rates in December.
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