What’s next for the US after the US mid-term elections?
The desk suggests that the results of the recent US mid-term elections may catalyze a weaker USD amidst heightened volatility in financial markets. Per the full note from MUFG EMEA, a major factor influencing the USD's trajectory is the Republican Party's defeat, which could pressure the Trump administration to pursue policies aimed at alleviating the cost of living crisis, such as improving relations with Iran to stabilize energy prices. This, combined with a strong US non-farm payroll print, may lead to contradictory market dynamics as traders balance inflationary risks against a potentially less aggressive Fed response. The expectation for USD performance hinges significantly on these evolving political and economic narratives, implying potential weakness in the dollar if optimism about US-Iran relations continues to build.
What the desk is arguing
The desk believes that the mid-term election results could result in a weaker USD as the political landscape shifts to potentially address pressing economic issues. According to MUFG EMEA, the Republicans' significant losses may lead to increased pressure on the administration to pivot towards more conciliatory policies, particularly with respect to energy supply dynamics.
A notable development was the nearly 20% decline in Brent crude oil prices, reflecting renewed optimism surrounding a potential US-Iran deal. This indicates that if energy markets stabilize, the inflation burden could ease, potentially shaping Federal Reserve policy into a more dovish stance despite strong labor market indicators like the recent non-farm payroll figures.
Where it sits in our coverage
Our current consensus targets for USD are aligned around a weakening outlook with a projected target of 1.075 for the EUR/USD pair. Specific firm forecasts include: - jpmorgan - 1.10 (Mar26) - bofa - 1.04 (Mar26)
This view aligns with the broader consensus that anticipates a weakening dollar, especially in light of recent domestic political developments and energy market fluctuations. Given the split in targets, our perspective leans towards the higher side of the range reflecting a cautious optimism in resolving external pressures affecting the USD.
How other firms see it
Several firms are aligned with the outlook for a weaker USD, including jpmorgan and others suggesting pressure from domestic policy changes and international negotiation outcomes. Conversely, bofa presents a contrary stance, predicting that the dollar may find support at lower levels amidst persistent inflation issues.
Watch for the EUR/USD trajectory alongside evolving US energy policy discussions as these dynamics could heavily influence trader sentiment and market movements in the near term.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Recent US mid-term elections may lead to a weaker USD.
- 02Political pressure to address cost of living could drive USD dynamics.
- 03Energy prices are a key factor in shaping economic outlook.
- 04Bipartisan pressures may encourage proactive economic policies.
Market implications
Traders should monitor the USD for potential weakness, particularly if Brent crude prices continue to stabilize alongside improving geopolitical relations. A key level to watch will be the 1.075 mark in the EUR/USD pair, as fluctuations could suggest shifts in trader positioning and sentiment regarding US economic policy.
Risks to this view
If the Republican Party manages to maintain control and block significant policy changes, it could validate a stronger USD narrative. Additionally, unexpectedly high inflation metrics in the upcoming quarterly reports could deter the market from favoring a weaker dollar in the near term.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst. It's Friday 6th November 2026 and joining Lee to pose some questions on the financial market themes for the week ahead is Henry Cook, Senior Economist. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.
It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hi Lee, it's been a busy week hasn't it?
US midterm elections, we've had a sharp equity sell off, energy prices are retreating as well. And just now we had a rather high looking US non-farm payroll figure as well. How are you seeing it all?
Yeah, hi Henry. It's like I say, it's been a busy week in financial markets and yeah, I mean the two kind of main developments that we've been focusing on this week are firstly the sharp move lower that we've seen in energy prices. If we look at say the price of Brent, that's fallen by almost 20% over the past week.
And to us this kind of mainly reflects renewed investor optimism over the potential for a US-Iran deal going forward to try and ease the tightening of supply in global energy markets. Obviously at the start of this week we had kind of encouraging media reports suggesting that the US and Iran are kind of moving closer towards kind of fresh talks ahead of the midterm elections. And then obviously since the midterm elections results were released, that has kind of added to investor optimism that there could be more pressure now on the Trump administration to try and reach a deal to ease the cost of living crisis given that the Republicans obviously suffered a heavy defeat in the midterm elections.
And I think the main reason why they lost so badly in the elections was the higher cost of living. So definitely one way which the Republicans, Trump administration could try to restore that popularity at home would be to try and reach a deal more quickly with Iran. Obviously that would likely require more compromises on their side and on the Iranian side, but definitely the markets become more optimistic over that prospect.
And then secondly as well, the other kind of big move this week, like you said, has been the sell-off that we've seen in AI-related investments, the correction there that we've seen in recent weeks is continued. If we look at the NASDAQ composite index now over in the US, that's now down around sort of 12 to 13 percent from last month's high, which is the largest correction that we've seen since the first quarter of this year, with weakness kind of very much concentrated in the kind of semiconductor stocks and the neocloud stocks. Again, I would say the midterm election results have kind of added to that sell-off by kind of raising uncertainty over the outlook going forward for the continued build out of AI data centers in the US and the potential for tighter regulation as well on the sector in the future from the Democrats having more control, which kind of adds to uncertainty over future profit expectations.
So yeah, that's definitely been a factor which has been driving markets this week. And just looking at FX markets performance in particular, like if we look at how the FX markets performed this week, we have seen kind of relatively more modest moves in FX compared to in the equity and commodity markets. The best performing currencies have been the traditional safe haven currencies like the yen, US dollar and Swiss franc, while more high beta riskier currencies like the Aussie, the Scandi currencies and the Kiwi have all underperformed.
So generally kind of fits with price action, which is in a more kind of risk off kind of trading environment. Yeah. And what do you make of the sort of the volatility in dollar price action?
Yeah, I mean, it's been a bit of a wild ride for the dollar this week. Initially, we did see the dollar selling off after the midterm elections revealed powerful blue wave. But as we've seen towards the end of this week, that dollar sell off proved to be relatively short lived with the dollar bouncing back strongly at the end of this week, driven both by safe haven demand as equity markets sold off sharply and also further evidence today of stronger US employment growth.
That's definitely been a story that we've seen in recent months is that the labor market there is improving in the US and that's making the market more confidence over the need for further Fed rate hikes. Like our overall take on the midterm election impact on the dollar is that we don't think it is kind of a big game changer for the dollar in the near term. But we do think kind of going forward into next year and beyond, it does add to downside risks for the dollar.
There are a couple of reasons. One, we think that the heavy Republican defeat, like we said before, does put more pressure on the Trump administration to reach a quicker deal with Iran to ease the energy price shock. And if we see any further progress towards a deal and if energy prices remain at lower levels or fall further from here, I think that will help to ease some of the dollar strength that we've seen this year.
And then secondly, on top of that, like you said, the strong showing for the Democrats adds uncertainty over the expectations for profits for AI related companies in the US. And for most of this year, really since the conflict with Iran started, US equities have outperformed equities from the rest of the world. And that has encouraged record inflows into risky US assets such as corporate bonds and equity markets.
And if going forward, US equities now start to underperform as there's more uncertainty over the AI related stock performance. This could, at the very least, start to trigger some more hedging of that US asset exposure by foreign investors or even trigger some paring back of those kind of overweight, long US asset positions, which could lead to some further dollar weakness. And then obviously, finally, on top of that as well, there's also the possibility that if US equity markets continue to weaken, that's going to tighten financial conditions in the US, which alongside lower energy prices, it would make the Fed, I think, more cautious over continuing to hike rates.
So if the Fed doesn't meet market expectations for more Fed hikes, that as well could eventually lead to some further dollar weakness going forward. So that's kind of our overall take on terms of how we think it's going to impact the dollar. Over here in Europe this week as well, we've obviously had an important policy meeting from the Bank of England who raised rates for the first time.
It would be interesting to hear your own thoughts, Henry, on that policy update. Yeah, I mean, 25 basis point hike, that was the kind of market expectation. It was our expectation, but it was a surprisingly hawkish meeting.
First of all, there were nine members, all of the nine members on the MPC who voted for a hike. We thought some of them might sit on their hands again. And one member actually wanted to go for a larger 50 basis point move as well.
So the most bit was hawkish. And within those nine MPC members, five of them have kind of indicated that they're willing to go further with another rate hike in the future. So yeah, it's not a case of one and done from the Bank of England.
They're sort of setting up for a couple of hikes in total going forward. And yeah, I mean, given that guidance, there is the kind of question, why wait? So suddenly the prospect of a back to back move at the next meeting in December seems quite plausible.
It is priced 50-50 or so at the moment. In terms of our call, our central call, we're sticking with February for the next and indeed final hike in the cycle. That would mean we see a terminal rate of 4.25% from the Bank of England.
Right now, we're not seeing any obvious signs of inflation broadening beyond energy in the UK. And there is a degree of labour market slack as well, which we assume will kind of remain the case. So yeah, in terms of the hike this week, the Bank of England is kind of acting on a precautionary basis that they're sort of leaning against the risks that inflation might broaden beyond energy.
But if that remains the case, I mean, there's going to be plenty of data between now and the next meeting in December, we get to labour market reports, we get to inflation reports, lots of survey data, that will all shed a bit more light. But if second round effects remain contained, then we don't really see the urgency to go again at the next meeting in December. And the other point worth making is that the peak in UK inflation could be a bit lower than what the Bank of England said this week.
The latest forecasts were based on energy prices up to the end of October. And as you said, Lee, since then, both oil and gas prices have come down quite sharply by around 15% or so, I think. And that matters.
UK inflation is still set to increase quite sharply in January. There's this kind of rise in the household energy price cap, which is baked in now, we're almost all the way through the kind of three month monitoring period, so that that will happen. But fuel prices maybe won't rise quite as much as the Bank of England was expecting in their latest projections.
And I'm kind of tracking the peak in UK inflation around 4.5% rather than the 5% or so which the Bank of England set out. So yeah, if energy prices remain at current levels or lower, then I think the Bank of England will likely be kind of revising down its inflation projections. Of course, we've learned to be quite cautious about making any assumptions on energy prices and the path ahead given what's happened so far this year.
And yeah, energy will be the kind of swing factor, the key swing factor for the Bank of England outlook. If prices rise again, then yes, December would be quite likely. If upcoming data does start to show signs of second round inflation effects, then we would start to expect a higher terminal policy rate as well above the 4.25% figure we assume at the moment.
So yeah, there's lots of uncertainty out there for the Bank of England outlook, but it was a kind of hawkish update this week. That's the key point. Yeah, I think as well, it's interesting in the week ahead, we also have the release of the latest GDP data from the UK.
Yeah, that's right. Yeah. I mean, that's kind of a bit of good news really when it comes to the UK outlook.
Growth is looking a bit better. As you say, we'll get the Q3 GDP numbers next week is likely to come in around 0.7% quarter on quarter, which is a very healthy figure. We're not really seeing any slowdown in the UK economy in the second half of the year, which we have seen recently.
Part of that perhaps is that the government has quite deliberately tiptoed through the budget process and kind of limited speculation around possible tax rises. In the end, it was a very low key budget. But there's also some tailwinds, I think, from AI.
The Bank of England estimates that AI is contributing a fair chunk of UK GDP growth at the moment, around 20% or so. There are some signs as well, it's still early days, it's still tentative, but there are some signs that productivity and kind of related business services sectors might be increasing, which is good news. If that becomes more obvious and is sustained, then the Bank of England could tolerate slightly higher rates of pay growth potentially.
And yeah, actually, that is something else that we're watching quite closely. The closer we get to year end, the better sense we will have of annual pay settlements for next year, for 2027. Survey data right now is pointing to around 3.5%, which is really the upper limit of what the Bank of England might see as compatible with its inflation target.
So yeah, the productivity story, if there are indeed any kind of changes there, that could become quite relevant to the Bank of England outlook. Great, thanks, Henry. That brings an end to today's podcast.
Thanks everyone for listening and have a good week ahead. Subscribe. Contact your MUFG sales rep for more information.
Come back next week for more insights from the Global Markets Research Team.
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