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What you need to know about US midterm elections

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New Congress will be chosen by American voters at polls on November 8. There will be two years of political gridlock according to opinion surveys since the Republicans are predicted to regain control of at least one chamber. In the event of such a result, equities markets may rebound in relief, and the strong dollar may experience some profit-taking.

The potential effects of this election on US government policy and the financial markets are of investors’ concern. The Senate is now split 50-50, and the Democrats currently have a small majority in the House of Representatives.

Because President Biden’s authority would be diminished by a divided Congress, there would be less opportunity to pass legislation that would be detrimental to business, such as raising corporation taxes or tightening regulations.

The danger is that the market’s default scenario already assumed a divided Congress. Therefore, although the possibility seems fairly low, if the Democrats are successful in pulling off the surprise victory and hold both chambers, that might trigger a significant selloff.

What’s in it for dollar?

Regarding the US dollar, there is no obvious trend that has occurred following midterm elections. How the election affects the direction of Fed policy will ultimately determine how the market reacts. The federal government’s capacity to implement new spending would likely be constrained by a divided Congress in this regard. In addition, recent actions taken by the Biden administration, such as waiving student loan will be opposed should the Republicans take over.

All things considered, the outcome of this election will not drastically alter the financial landscape. It might be the catalyst for a profit-taking in the dollar and a short-squeeze in the stock market. Nevertheless, they are more likely to be brief moves than trend reversals in the end.

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