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US midterms and payrolls: Could the dollar fall even as yields rise?
Key points:
- US midterms on 3 November could reshape the fiscal outlook. A Democratic sweep is a scenario worth watching, while continued Republican control could revive deficit concerns.
- Higher Treasury yields may not mean a stronger dollar. If yields rise because of fiscal risk rather than growth, USD could weaken.
- Payrolls on Friday will test Fed expectations, while gold's break below USD 4,000 and USD/JPY's struggle near resistance create interesting trading opportunities.
Two major catalysts are converging this week: US midterm elections on Tuesday, 3 November, with results emerging during Wednesday's Asian session, and October nonfarm payrolls on Friday, 6 November at 9:30pm SGT.
The key question for FX traders is whether markets continue to reward the dollar for higher interest rates, or start penalising it for fiscal and political uncertainty.
Midterms: Four scenarios for FX traders
The election could change expectations for fiscal spending, regulation and the administration's ability to advance its agenda. But the market reaction may be less straightforward than a traditional risk-on or risk-off response.
Election outcome | Potential market reaction |
Democrats win House and Senate | Greater constraints on Trump's fiscal agenda could reduce expectations for additional spending and Treasury issuance. Yields and USD could ease, although political confrontation remains a risk. |
Democratic House, Republican Senate | Gridlock could limit fiscal expansion. Potentially modestly lower yields and USD, especially if this outcome is already anticipated. |
Republicans retain both chambers | Fiscal expansion expectations could lift yields. USD may initially strengthen but subsequently weaken if rising deficits and term premiums dominate. Gold could benefit from fiscal concerns. |
Delayed or contested results | US-specific uncertainty could favour CHF, JPY and gold over USD. However, a global liquidity squeeze could still generate temporary dollar demand. |
The important distinction: Higher yields driven by stronger growth are generally USD-supportive. Higher yields driven by concerns about US fiscal sustainability may not be.
Oil: The post-election wildcard
Another potential source of volatility is renewed US-Iran escalation after the elections.
If geopolitical tensions intensify or energy infrastructure and shipping are disrupted, oil could rise further, complicating the inflation outlook.
For FX traders, the implications are mixed:
- USD: Higher oil could reinforce Fed tightening expectations, but fiscal and geopolitical concerns may offset that support.
- EUR and JPY: Higher energy-import costs remain a headwind, although JPY could benefit from carry unwinds.
- CAD and NOK: Potential beneficiaries of higher oil, provided global risk aversion does not dominate.
- Gold: Inflation risks could weigh, but fiscal uncertainty provides structural support.
The opposite scenario also matters: renewed diplomacy or easing tensions could push oil lower and reduce inflation pressures.
Payrolls: Can the Fed stay hawkish?
Schedule: Friday, 6 November | 9:30pm SGT
Markets expect roughly 65,000 new jobs. After the Fed's October hold, the employment report will test whether another December hike remains justified under Chair Kevin Warsh.
The headline payroll figure matters, but unemployment, wage growth and revisions could determine whether the initial market reaction lasts.
Payroll outcome | Potential FX reaction |
Strong jobs + firm wages | Higher yields, stronger USD; gold under pressure |
Weak jobs + softer wages | Lower yields and USD; JPY and gold could benefit |
Weak jobs + persistent wage inflation | Stagflation concerns; yields and USD could diverge, gold volatile |
Key FX trades and levels to watch
EUR/USD: Bearish, but approaching support
EUR/USD remains below its 50-, 100- and 200-day moving averages, with French fiscal pressures and elevated energy costs adding to the headwinds.
- Support: 1.1111, followed by 1.0882.
- Resistance: 1.1340, then 1.1369–1.1423.
Trade bias: Failed rebounds remain interesting for traders looking for further EUR weakness. However, with the pair already close to support, a Democratic sweep combined with softer payrolls could trigger a sharp USD reversal and EUR short covering.
USD/JPY: Resistance is building
USD/JPY is hovering around its 50-day moving average at 157.39 but remains below the 200-day at 158.60 and 100-day at 159.17.
- Support: 157.39, then 154.78 and 151.94.
- Resistance: 158.30–158.60, followed by 159.17.
Trade bias: A failed rebound towards 158.30–158.60 could favour JPY recovery if US yields retreat or political uncertainty triggers carry unwinds. A sustained break above 159.17 would challenge that view.
The main risk to yen strength is another oil spike, given Japan's dependence on imported energy.
Gold: Can USD 4,000 be reclaimed?
Gold has broken below the psychological USD 4,000 level and remains in a descending channel, below its major moving averages.
- Support: USD 3,880–3,900, then approximately USD 3,700–3,750.
- Resistance: USD 4,000, followed by USD 4,205–4,226.
Trade bias: The immediate technical picture remains bearish while gold trades below 4,000. A break below 3,880 could extend liquidation.
However, fiscal anxiety, contested election results or renewed geopolitical escalation could revive safe-haven demand. Reclaiming 4,000 would be an early stabilisation signal, while a move above 4,205–4,226 would provide stronger evidence of recovery.
Bottom line: Watch the dollar-yield relationship
The biggest risk this week is assuming that higher US yields automatically mean a stronger dollar.
Midterms could reshape the fiscal outlook, payrolls could reprice the Fed, and renewed geopolitical escalation could push oil and inflation expectations higher.
For traders:
- EUR/USD: Bearish trend, but support near 1.1111 raises reversal risk.
- USD/JPY: Resistance around 158.30–159.17 makes yield-driven reversals worth watching.
- Gold: Below 4,000, the trend remains fragile, but fiscal and geopolitical uncertainty could provide a recovery catalyst.
The signal to watch is whether USD rises or falls alongside Treasury yields. A dollar decline despite rising yields could suggest investors are becoming more concerned about US fiscal risk than attracted by higher returns.