The US will hold its midterm elections on 3 November, after two years marked by rising trade protectionism, pressure on Federal Reserve independence and, since the spring, the Iran war. Republicans are expected to take a heavy electoral hit, while Democrats are expected to make substantial gains, as the economic backdrop has deteriorated with rising inflation and higher interest rates intensifying an affordability crisis.
Implications for Fiscal Policy
For markets, the key issue is how the result may shape fiscal policy, at a time when a broad sell-off in Treasuries has driven yields to multi-decade highs. That combination is expected to put election-driven fiscal expectations under tighter scrutiny than usual, increasing the risk of a larger market reaction, including in FX.
Market Reactions and Volatility
There have been limited signs of pre-election nerves so far: 1-month implied volatility in EUR/USD rose in late September, but this is attributed to wider sovereign bond market moves rather than politics. Treasuries have still fallen sharply in recent weeks, linked to inflation concerns, while the S&P 500 has pushed to fresh record highs this month.
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