Headlines

*Biden approval rating drops as Democrats brace for losses

*Gold stalls as investors brace for US inflation data

*Dollar fades from initial rebound to mixed benefit of peers

*Asia trades mixed on China reopening hopes offset by further infection rise

FX: USD dropped again on Monday as the 50-day SMA capped upside at 111.25. Global risk sentiment remains relatively constructive as investors seek positives amid multiple uncertainties. Seasonal pressures, which are USD negative, are evident as near-term focus turns to the US mid-term elections. US Treasury yields continued to edge higher above 4.2% on the 10-year. October highs are 4.33%.

EUR/USD benefitted again from some ECB hawkish rhetoric. It pushed above 0.9952 but remains below the 100-day SMA at 1.0040. Last month’s highs may also offer resistance at 1.0088/93. GBP/USD has given back the 1.15 handle this morning but stays above the pandemic low at 1.1409. Strong support is the Fib level (23.6%) of this years’ fall at 1.1157. USD/JPY traded in a narrow range but closed lower at 146.55.

AUD/USD is coming into a broad zone of resistance from October at 0.6522/47. USD/CAD is supported by the Fib level (38.2%) of the August rally at 1.35. A potential head and shoulders reversal pattern has formed. A break lower sees the halfway point of that rally as next support at 1.3352. Gold fell back below the $1676 zone. It trades around the 50-day SMA at $1672 adding to this area of confluence.

Stocks: US equities gained for a second day on the eve of the US midterms.  Investors bought the dip in growth stocks like tech and communication services despite higher yields. The Nasdaq added 1.1% and the benchmark S&P 500 closed higher +0.96%. But the Dow outperformed again, gaining 1.3% and moving above its 200-day SMA at 32,560. Last week’s high is 33,071.

Asian stocks are mixed as positive momentum from Wall Street battles with rising Chinese Covid infections. The Nikkei 225 edged closer to 28,000. But Chinese stocks were more subdued despite the reopening rumours which officials continued to push back against.

S&P 500 futures are modestly in the red. European equity futures are contained and showing a small bid after cash markets closed up 0.6% yesterday.

Day Ahead – US mid-term elections

The latest polls and betting markets indicate that the Republicans are likely to win control of both the House and the Senate. The latter race looks tighter. The major downside risk for the dollar is a Republican win in both. This would imply a hamstrung President who would be unable to deliver fiscal support in a potential recession. There would be an increased risk of more inflationary policies.

A split Congress meaning only the House goes to the Republicans would see fairly limited dollar volatility. It will be tough to pass legislation over the coming two years. But this has favoured stocks historically with indices higher six months after the election. Some White House watchers are already focusing on the upcoming presidential elections. Former President Trump has said he will make a “big announcement” on November 15.

Chart of the Day – German Dax hits resistance

Sentiment in Europe has improved recently as the drop in energy prices indicates that any recession through winter may not be as bad as initially thought. The Dax index has rebounded strongly from its October lows below 12,000.

A clear uptrend has formed with a series of higher highs and higher lows. Prices have now reached the 200-day SMA at 13,608 and the 38.2% Fib level of this year’s fall at 13,522. This is just above the mid-September top at 13,569. Bulls will aim for a break towards the August high at 13,974. The midpoint of this year’s drop is 14,051. Support below is 12,987.