The US midterm elections could spark volatility across currency markets, particularly if Republicans outperform expectations. With Treasury yields and risk sentiment likely to influence the dollar's response, USD/CHF looks vulnerable to further losses while USD/CAD clings to a potentially significant support zone.
View related analysis:
- US Midterm Forecast: The Key Risks for Traders to Watch Through the US Elections
- Yen Bulls Loaded Up into BOJ as Euro Shorts Hit 11-Year Extreme | COT report
- AUD/USD Weekly Outlook: RBA Hike, US Midterms and NFP Collide
- Forex, Gold and Oil Outlook: FX Crosses May Have the Edge
US Midterms Put the Dollar on Edge as USD/CHF and USD/CAD Test Support
US Midterms Could Stir FX Volatility
The US midterm elections could inject volatility into currency markets this week, with prediction markets assigning around a 70% probability to Democrats taking control of both the House and Senate. Such a result could constrain President Trump's fiscal agenda and weigh on US Treasury yields, potentially undermining the dollar.
However, with a Democratic sweep already widely anticipated, Republican outperformance presents the greater risk of a market surprise. Risk sentiment will also matter, as election-related uncertainty could favour defensive currencies such as CHF, while weighing on risk-sensitive currencies such as AUD and CAD.
Yet implied volatility remains relatively contained ahead of the elections, with expected daily ranges below their 20-day averages for five of the seven major currencies shown. This suggests options markets are not pricing in an outsized move despite the potential for an election surprise.
Source: LSEG
Three Election Outcomes and Their Impact on USD
- Democratic sweep (around 70%): Potentially USD-negative through fiscal gridlock and lower yields, although much is priced in. A negative equity reaction could complicate the FX response.
- Democratic House, Republican Senate (around 26%): A meaningful surprise, but still produces divided government. The USD response could therefore be relatively muted.
- Republican sweep (roughly 6%): The largest surprise, with potential for higher yields and a stronger USD through renewed fiscal expansion expectations.
US Midterm Elections: FX Volatility Roadmap
Election Night Timings for FX Traders
US midterm election results will begin emerging from 6 pm New York time on Tuesday, 3 November (10 am Sydney on Wednesday), with the main volatility window likely to be 7 pm–11 pm ET (11 am–3 pm AEDT).
This could make Wednesday's Asian session particularly volatile for FX traders as control of Congress becomes clearer. However, closely contested races could delay a definitive result beyond election night.
Senate Control and Treasury Yields in Focus
While prediction markets heavily favour Democrats winning the House, control of the Senate remains less certain and could drive the larger market surprises. Traders should also be wary of initial FX moves reversing as more votes are counted.
The reaction in US Treasury yields and equity markets will be critical in determining whether the dollar strengthens or weakens, particularly against CHF, AUD and CAD.
Volatility could extend into Thursday's Sydney session, with the US ADP employment report, ISM Services PMI and Treasury's quarterly refunding announcement providing additional catalysts.
USD/CHF Tests Critical Support Ahead of US Midterm Results
The weekly chart shows that USD/CHF remains within a bullish channel, though prices are retracing towards its lower boundary. Bears have made a minor attempt to break below the 100-week EMA ahead of the midterm results. A risk-off tone could see USD/CHF fall further, with the Swiss franc attracting safe-haven flows or lower Treasury yields weighing on the US dollar.
The daily chart shows USD/CHF struggling to hold above a high-volume node (HVN), having closed near the day's low. This could favour bears seeking to fade rallies within the range of the past four days, up to the monthly pivot point (0.8278).
However, given the proximity of the 100-week EMA and HVN, I am on guard for a bounce from current levels. A break beneath 0.8156 and the monthly S1 pivot (0.8162) is required for a clearer move towards 0.8100.
Source: ICE, TradingView
USD/CAD Tests 1.3940 Support as Bearish Momentum Fades
USD/CAD is back below 1.4000 after selling off for three consecutive weeks, though bearish momentum is waning. Last week's range was the smallest of the three bearish candles, forming an inverted hammer just above the 1.3940 high. While the midterms could send USD/CAD beneath this level, it remains an interesting support zone as it also coincides with the 200-day EMA.
The daily chart shows a bullish divergence on the RSI (2), with Monday's small bullish hammer respecting the 200-day EMA and 1.3940 high. A break above 1.4000 could see USD/CAD head towards the monthly pivot point around last week's high (1.4068), while a break beneath 1.3940 opens up a move towards 1.3900 and the monthly S1 pivot just below 1.3850.
Source: ICE, TradingView
