Democrats Take The House
The initial results from the US mid-term elections point to the divided Congress that was widely expected. While Trump’s Republican party was able to maintain a majority in the Senate, Democrats took control of the House of Representatives with a projected gain of 34 seats. Such a win is far from a landslide, however, and will give Democrats a smaller majority than the one currently held by the Republican party.
Trump Extends Senate Majority
Although Trump lost control of the House, it isn’t all bad news as his party did gain 4 further seats in the Senate, extending its majority there. This means that the president’s future candidates for Court and the Fed will be more assured. Furthermore, despite Democrats now being able to vote for impeachment with a simple majority in the house (which would make a lot of noise and grab headlines), the likelihood of them achieving the two-thirds Senate majority needed for a conviction has of course, decreased, making impeachment less likely, not more.
Trump Now Side-Lined On Domestic Policy
However, a divided Congress does mean that Trump will have an even greater challenge when it comes to pursuing his domestic policy agenda in Congress. Key areas of Trump’s domestic policy such as healthcare reform, immigration reform, infrastructure investment, and further tax changes will now become side-lined as the chances of Trump receiving congressional approval for his current proposals has dramatically decreased. One key bearish factor here is the unlikelihood of further fiscal expansion, planned by Trump which investors had been looking at to boost USD in the coming years.
Trump To Pursue More Executive Orders
Consequently, we are likely to see Trump’s tactics shift and for him to pursue policy change through increased use of executive orders. Trump has already spoken about his plans to terminate the citizenship rights of children of non-citizens and authorized migrants on US soil via the use of such orders and will likely look to test his capabilities sooner rather than later. Ultimately, it will be the Supreme Court which will determine the extent to which the President can use executive orders.
Risk of Further Trade War Escalation
With Trump’s ability to affect domestic policy change now compromised, we are likely to see a greater focus on foreign and trade policies. While recent headlines have highlighted Trump’s openness to a trade deal with China, there is a risk that we see a return to a more hard-line approach from Trump, increasing the risk of a further escalation of the trade war rather than a cease-fire.
Debt Ceiling Standoffs To Intensify
One further issue stemming from the divided Congress which we are likely to see take greater prominence is that of government funding and raising the debt ceiling, on which topics we are likely to see greater government standoff. The president is still looking for funding for the Mexican border wall (which already required bi-partisanship due to the 60-vote supermajority needed in the Senate) and this is likely to prove even more difficult to secure having lost the majority in the house.
With Trump now unable to easily pursue fiscal expansion, and with an increased risk of fiscal policy tightening alongside the Fed tightening monetary policy, we are likely to see greater downward pressure on USD and US asset markets.
USD and US asset markets were dramatically higher during Trump’s election campaign on the promise of massive fiscal stimulus. However, as it became clear that the President would not be able to pursue these policy promises easily, USD retreated. Now, with it being even more difficult for the President to seek fiscal stimulus, we are likely to see even further USD selling as the market reacts with disappointment.
With the US mid-terms results spelling gridlock for US fiscal expansion and with Brexit headlines highlighting optimism (pointing to the potential for a deal by the weekend) GBP is rallying hard against USD, and we are on the verge of a breakout. The recent swing low is now looking like a double bottom and price has subsequently broken above the bearish trend line from 2018 highs. We have another resistance trend line just above market, but the key level to watch is the 1.3249 – 1.3290 level, above here and we should see greater upside momentum.
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