Investing.com — Sterling traded slightly higher on Tuesday while the euro also firmed, as the dollar softened on lower oil prices and positioning ahead of the U.S. midterm elections, with investors looking to Thursday’s Bank of England meeting, where a 25 basis point rate hike to 4% is widely expected.
Sterling rose 0.0% against the dollar to $1.3441, while the euro gained 0.03% to $1.1187, as of 05:09 ET (10:09 GMT).
Markets are bracing for a Democratic win in the House, with the Senate a closer call. Prediction markets give Democrats a 74% chance of taking the Senate, ING said.
“A blue sweep can put some pressure on the dollar,” said Francesco Pesole, FX strategist at ING. But he added: “We don’t expect today’s US midterm results to cause structural shifts in FX.”
“The greenback continues to respond predominantly to the Fed story,” Pesole said. He expects a split Congress to have “a neutral or slightly positive USD impact.”
Padhraic Garvey, regional head of research, Americas at ING, said: “The more probable blue sweep should have little market impact, as it should be broadly discounted.”
Traders await U.S. JOLTS job openings data today, Wednesday’s Treasury refunding announcement and Friday’s payrolls. Garvey said a cut in long-end issuance is possible but that “no change to the issuance profile” is equally probable.
HSBC said sterling “nudged up against USD yesterday as a softer dollar offered support” ahead of the Bank of England decision.
The BoE is widely expected to raise rates 25 basis points to 4% on Thursday. ING’s James Smith and Michiel Tukker said, “Sterling is trading reasonably well, helped by the view that high energy prices leave the Bank of England no alternative but to hike rates on Thursday.” They forecast a 7-2 vote and noted that “more than 100bp of hikes” are already priced in.
“EUR/USD is looking to establish support at 1.120 after a good start to the week,” Pesole said. Any Democratic sweep “could help, but we don’t expect radical mood changes in the pair.”
On the ECB, Pesole said, “Since last week’s meeting, we’ve heard some hawkish comments, endorsing market expectations that at least another hike is needed.” Several ECB speakers appear today, including Nagel and Kocher.
