THINK Ahead: 3 ways the US midterms could reshape the global economy
In the lead-up to the US midterms, James Smith from ING posits that the outcomes could significantly reshape global economic dynamics despite perceptions of the election as a non-event. With a divided government likely, gridlock in Washington may pivot the focus of executive power towards foreign policy areas, possibly affecting oil prices and geopolitical tensions in the Middle East. The desk frames this as critical for institutional traders to consider given that global risks are interlinked to US decision-making processes. As oil price fluctuations and tariff reviews loom large in a gridlocked environment, monitoring these developments is essential.
What the desk is arguing
The desk argues that the US midterm elections hold substantial implications for the global economy, particularly in areas of foreign policy and energy prices. Per the full note from ING, the possibility of a divided government suggests that the administration will seek to exert influence where it can, specifically in foreign relations, such as the situation in Iran and broader Middle Eastern dynamics.
The accompanying risks include fluctuations in oil prices, which are already sensitive to geopolitical shifts. Should the US take a more aggressive stance or seek diplomatic avenues, oil markets might react sharply to these moves, furthering volatility in FX markets.
Where it sits in our coverage
As it stands, our consensus for EUR/USD is 1.075, sitting in the range of 1.04 to 1.12. Specific targets include 1.10 from jpmorgan for March 2026 and a countering stance at 1.04 from bofa for the same tenor.
This view aligns with a prevailing sentiment among firms, positioning at the upper end of expected volatility in the lead-up to critical geopolitical events. The consensus appears cautiously optimistic but wary of how political gridlock might influence economic sentiment and global risk appetite.
How other firms see it
Aligned firms like jpmorgan and goldman predict that sustained tensions in foreign policy will drive market reactions, particularly tied to oil prices, while bofa expresses a bearish stance expecting economic stagnation regardless of election outcomes. This contrasts shows the division among firms regarding how much weight should be placed on US political stability's impact on currency movements.
Monitoring related currency pairs, such as USD/JPY, will provide insights into broader investor sentiment reacting to upcoming US midterm results and their fallout.
What the calendar says
Currently, there are no high-impact events scheduled on the calendar within the next 30 days that would directly correlate to this commentary but traders should remain alert for any shifts in oil prices as the midterms unfold, which may influence subsequent trading strategies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US midterms may yield significant global economic shifts despite perceptions of a non-event.
- 02Gridlock in Washington could enhance the administration's focus on foreign policy and energy price management.
- 03Volatility in oil prices could be triggered by election outcomes and subsequent executive decisions.
Market implications
Traders should keep an eye on how oil prices react to the midterm election results as they could signal broader market movements. A pivotal level to watch is the reaction around the $80 per barrel mark for crude oil, which might interact heavily with currency valuations in the coming weeks.
Risks to this view
Should there be unexpectedly aggressive moves in foreign policy or a complete party takeover, the anticipated gridlock may dissolve, leading to rapid shifts in market expectations, particularly in currency response to inflationary pressures.
Opinions Opinion by James Smith THINK Ahead: 3 ways the US midterms could reshape the global economy Published 14:45 United Kingdom From data centres and oil prices to tariffs and strained public finances, James Smith looks at how next week's US midterms could be more consequential than you think Next week's US midterms could have significant economic consequences Whisper it, but are Tuesday’s US midterms a bit of a non-event? Perhaps, but that risks overlooking some potentially significant economic consequences. America’s vote has created surprisingly little conversation in recent weeks.
No doubt, that is because the range of plausible outcomes has narrowed. The Senate race still hangs on a knife edge, but the House looks increasingly likely to fall to the Democrats. Clean sweep or not, Washington is heading for divided government.
That sounds like a recipe for inaction. But gridlock could increase the importance of areas where the president still has room to act. Here are three areas where I think the midterms could have global consequences... 3 scenarios for the US midterms Source: ING "> Source: ING First, the Middle East.
My colleague James Knightley recently argued that a split or Democrat-run Congress could pull Donald Trump in two directions: emboldening him to double down on the Iran war, while inviting greater pushback from lawmakers. Gridlock makes domestic legislation harder, increasing the temptation to focus on areas where executive power is greater, including foreign policy. At the same time, a Democrat clean sweep would give the party more confidence to challenge the White House on Iran, potentially including over war-related funding.
But the new Congress does not take office until January. The more immediate question is what happens after Tuesday. Is Washington making a final push to lower oil prices?
JD Vance’s letter to Iran this week was the clearest sign of diplomacy in some time. Or is the US preparing for fresh strikes once the midterms are out of the way and the political cost of higher gasoline prices becomes less pressing? Reports of additional US military capabilities in the region point in that direction.
Markets are clearly more worried about the latter. But if escalation does not materialise, our commodities team thinks some of the sizeable risk premium embedded in energy prices could unwind. That matters enormously for Europe.
Eurozone inflation could plausibly hit 4% next week, and that’s biased to go even higher so long as natural gas prices keep rising. If nothing else, expect elevated inflation until next summer, as I argued last week . The Bank of England is poised to hike next week for precisely this reason.
The rise in energy prices has been more significant than at the same point after the Ukraine invasion Source: Macrobond, ING "> Source: Macrobond, ING Second, AI. I don’t need to tell you how central this is to the US growth story. This week’s strong GDP data reminded us of that.
AI-related investment is rising by more than 20% year-on-year, while CapEx away from the build-out is still struggling for momentum. But it won’t have escaped your attention that AI is becoming a political issue too. Voters are increasingly vocal about the rapid build-out of infrastructure, particularly data centres.
An eye-catching poll from The Economist showed Democrat support surging this year among people living within 2km of a data centre, a group it estimates at around 12 million Americans. That is a serious number of American voters. The immediate federal consequences may be limited.
Permitting battles are often state and local issues, while attempts by Congress to unwind federal tax incentives or pro-construction policies could run into a presidential veto. But the midterms look like a marker for just how politically contentious the AI build-out could become ahead of the next presidential election in 2028. Given how dependent US equity markets have become on the AI story, and how shaky certain corners of the AI trade are starting to look, this whole issue matters well beyond Washington.
AI-related investment is dominating US growth Source: Macrobond, ING "> Source: Macrobond, ING Third, fiscal policy and tariffs. America’s fiscal trajectory looks ugly on almost every metric. The federal deficit is around 6% of GDP, and there is little evidence of appetite in Congress for meaningful consolidation.
Last year’s tax bill was an obvious opportunity to change direction. It was missed. The divided government makes another serious attempt over the next two years even less likely.
It’s a stark contrast with the UK and Italy, both of which released sensible budgets this week, and both look markedly better on public finances right now. Italy in particular is often tarred with the same brush as the US on fiscal policy, despite running a primary surplus. Back to the US, though, because fiscal gridlock could push attention back towards trade policy.
Remember tariffs? After the Supreme Court struck down Trump’s emergency tariffs, temporary 10% blanket rates ultimately gave way to a more permanent structure under Section 301. The issue has since slipped remarkably far down the agenda.
Refunds have lowered the effective tariff rate in the US Source: Macrobond, ING "> Source: Macrobond, ING But like foreign policy, trade is another power the president can wield unilaterally without Congress. Could we see the administration go after its trading partners – Europe in particular – with higher tariffs once again? In theory, this would matter a lot for inflation and the Fed.
Chair Kevin Warsh has repeatedly noted that roughly half of the inflation basket is running above 3%, and our analysis suggests tariffs explain a decent chunk of that. Then again, the refunds from the tariffs struck down in court have started rolling in and have further to run. Over the summer, as the chart above shows, those rebates exceeded the gross revenue from tariffs.
So yes, Tuesday evening might indeed be a quiet night for financial markets. But what happens next could make for a much noisier 2027. James Smith THINK Ahead in developed markets United States (James Knightley) Midterm elections (Tue): It will be a very busy week in the US, with the midterm elections on Tuesday and the October jobs report on Friday as the highlights.
All 435 House of Representatives seats and 35 of the 100 Senate seats are up for election on 3 November. Worries about the cost of living and the impact of AI on job security are regularly cited as key factors driving sentiment, while support for the conflict with Iran has wavered as gasoline prices climbed. Opinion polls currently suggest the Democrats lead by around eight percentage points nationally, and President Trump’s own approval rating has hit new lows, leading to Republican Party concerns about a demotivated electoral base.
If the Democrats gain control of Congress, this will hugely constrain what President Trump can do, leaving him to focus on trade and foreign policy. See our full preview for more details. Jobs report (Fri): This is the first of two jobs reports ahead of the next Federal Reserve policy decision on 9 December.
The low-fire, low-hire narrative around the labour market holds and we expect jobs growth to come in at around 75,000 with the unemployment rate remaining at 4.2%. Fed officials have made it clear that their focus, for now, is on getting inflation back down to the 2% target, so it would require a very soft outcome, potentially even a negative jobs print, to meaningfully move market pricing for that December meeting. Markets are currently putting an 80% probability of a rate hike, which looks fair.
UK (James Smith) Bank of England (Thurs): We expect a 7-2 vote in favour of a rate hike next week, the first since the Iran War. There's still scant evidence of second-round effects on inflation, but rising natural gas prices make it hard not to act. We'd expect the Bank to stay non-committal on its next steps given the hefty uncertainty, though we expect a follow-up hike in February.
The hawkish risk next week is that the Bank explicitly suggests further tightening is likely. Eurozone (Bert Colijn) Inflation (Wed): It’s the week after the ECB presser where President Christine Lagarde emphasised a lot of important data points she’ll collect before a December decision. The October inflation rate was one of them, and it’s up on Wednesday.
With energy prices still rising and a lagged effect of natural gas on consumer prices, we expect inflation to remain around the 4% mark in coming months. The most important piece of information is everything outside of energy, though, as the ECB is nervously looking at second-round effects emerging. So far, the effects have been negligible, and it will be key to see whether October starts to see some movement in core inflation and food prices.
Key events in developed markets Source: Refinitiv, ING "> Source: Refinitiv, ING Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more United States THINK Ahead Tariffs Mid-terms Iran war Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download In this opinion THINK Ahead in developed markets Author James Smith Developed Markets Economist, UK James is a developed market economist, responsible for ING's view on the UK economy and Bank of England.
He graduated from the University of Bath with a degree in economics and joined ING in 2015.
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