In the second part of our analysis of November’s upcoming midterm elections, we look at how outcomes might impact US debt and thus the markets’ response to US assets and the dollar.
Our earlier paper assessed the likelihood of Democrats retaking not only the House of Representatives but also the Senate. In any view, we see a likely end to the Republican trifecta (control across both houses in addition to the White House). Divided government seems a certainty.
Although we expect the likelihood of fiscal consolidation to remain low even under divided government, markets are unlikely to reach that conclusion immediately. Instead, the dollar may weaken initially as investors judge that a lower likelihood of fiscal stimulus implies weaker growth and narrower rate differentials. But if Treasury yields subsequently rise, as we expect they will, the implications for the greenback become much less straightforward.
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