The euro/dollar pair is trying to settle above the resistance level of 1.0060, which is the upper border of the Bollinger Bands indicator on the D1 timeframe. If the pair succeeds, it will definitely resume a long-term bull run. However, the midterm election may limit its upside potential. Fundamental factors of political nature tend to have a short-lived impact on Forex. Traders are now assessing the possibility of a split in Congress. This is why the EUR/USD pair is unlikely to settle above the parity level for a long time. Buyers need stronger drivers to push the pair higher. Apart from that, the US will unveil inflation data tomorrow, which may drastically change the trajectory of the pair.
Let's discuss the main political event of this week and of the month, namely the preliminary results of the midterm elections. Overall, we can draw some conclusions. Before the vote, many analysts assumed that Republicans would wrestle control over the Senate and the House of Representatives. Apparently, the battle will last until December. According to preliminary estimates, the ratio of seats in the Senate is 50:49 in favor of the Democratic Party after the second round in Georgia and a mixed result in Nevada. It means that Democrats may retain control even if Republicans win in Georgia but lose in Nevada. In this case, the situation of the last two years may repeat itself. In the previous elections, Republicans and Democrats had 50 seats each in the Senate. Kamala Harris, the Vice President of the United States, supports the Democratic party. She had the decisive vote back then. Under certain circumstances, if the above-mentioned states do not give their votes to Republicans, there will be no change in power in the Senate for the next two years.
As for the House of Representatives, as widely expected, Republicans won the majority of seats. However, it hardly surprised anyone. The Republican Party has approximately 223-225 mandates, while Democrats have 210-212. Republicans have already won the majority of seats (218). So, Democrats lost the battle for the House of Representatives.
Although the Republican Party failed to regain the upper hand in both chambers, it definitely took control of the House of Representatives. When it comes to the gubernatorial election, the situation is as follows: Democrats won 21 seats (they won in two states) and Republicans won 24 seats (they lost in two states).
Therefore, it is quite logical why traders are alert now. For almost two years, the House of Representatives, the Senate, and the White House have worked in unison. There were almost no conflicts. Now, the situation will change sharply as Republicans will call on reducing budget spending on social security and medical care. otherwise, they could block an increase in the debt limit. Among the possible risks of a split Congress is a shutdown. It refers to a funding gap period that causes a full or partial shutdown of federal government operations when the government fails to pass funding legislation for its next fiscal year
The greenback is also facing bearish pressure. In my opinion, this political driver will have a short-term influence on the market. No economic or political changes will happen in the foreseeable future because the Congress with its new members will begin work only in January 2023.
As a rule, market participants rarely focus on long-term hypothetical events that could occur in several weeks or months. Apart from that, Democrats still have leverage in the House of Representatives (the filibuster tactic, the right of the President's veto, the Republicans' inability to revoke the veto, etc.), including possible control over the Senate. However, Democrats will have the same leverage if they lose control over the upper chamber. Therefore, there will hardly be crucial shifts in the political situation in the United States.
Do not forget about tomorrow's release of inflation data. If the report is positive, traders will switch their attention to the Fed. They will be waiting for hints on whether the Fed will raise the key rate by 75 or 50 basis points.
It is rather risky to open short and long positions in times of market uncertainty. Therefore, I would recommend you today to take a wait-and-see approach e and wait for the release of inflation data.
