Forex Today: US Dollar eases as sentiment brightens before midterm elections

The key developments to watch on Monday, 2 November:

The US Dollar (USD) is finding it difficult to hold its own against its major peers as risk appetite improves at the start of the week. October's Manufacturing Purchasing Managers' Index (PMI) from the Institute for Supply Management (ISM) is the main release on the US economic calendar in the second half of the day. Remarks from central bankers will also draw close scrutiny. The more significant event, however, is Tuesday's US midterm elections.

Safe-haven demand following a sharp sell-off in technology shares helped the USD Index finish the previous week slightly higher. That support has faded early on Monday: the index is trading below 102.00 and is lower on the day, while US equity index futures have gained between 0.4% and 0.9%. The benchmark 10-year US Treasury bond yield, meanwhile, remains comfortably below 5%.

Over the weekend, US Secretary of State Marco Rubio said President Donald Trump wanted to settle the Iranian war “diplomatically,” without resorting to military force. Iran’s Supreme Leader, Mojtaba Khamenei, meanwhile instructed his senior military commanders to ready themselves for another confrontation with the US and Israel and broaden Tehran’s retaliatory options. Those orders came even as his leading diplomat indicated that diplomatic talks were making progress. Crude Oil is edging down on Monday, with West Texas Intermediate (WTI) shedding about 2% per barrel on the day.

Dollar confronts election uncertainty as ING urges caution on further gains

Positioning is likely to outweigh fundamentals in driving short-term moves, according to ING analysts, who identify the “main risk for the Dollar today is some precautionary unwinding of net-long positions ahead of Tuesday’s US midterm elections,” in their assessment. Pointing out that “a Democratic sweep is trading around 68% in prediction markets,” they say this outcome “could be seen as slightly negative for the US Dollar from a few angles, from higher risk of government shutdown and gridlock on debt ceiling negotiations to potential damage to already shaky AI-related sentiment.” ING's conclusion in these circumstances is that they “would be cautious in chasing the USD upside in the next few days.”

Keep up with our reporting on the US midterm elections.

Despite the shift towards risk aversion in the latter half of last week, Gold (XAU/USD) faced substantial selling, possibly reflecting deleveraging after the equity sell-off. Friday's decline exceeded 3.5%, taking the metal to a one-year low near $3,870. A corrective rebound is under way early on Monday, with XAU/USD trading above $3,900.

EUR/USD is recovering towards 1.1200 in early European trading on Monday, helped by the modest retreat in the USD. Germany's Retail Sales fell 2% month on month in September, reversing August's 1.2% rise. The release disappointed against market forecasts for a 0.4% increase.

GBP/USD is preserving its gains after advancing for three successive trading sessions. The pair is slightly higher on the day, just above 1.3400, ahead of Thursday's monetary policy decisions from the Bank of England.

USD/JPY is making modest gains during Monday's European morning, though it remains below 158.00. Speaking on Monday, Japanese Finance Minister (FM) Satsuki Katayama said the Joint FX statement with the US remained in place and that the government would respond to disorderly movements.