Forex Today: Why is the US Dollar easing as sentiment brightens ahead of midterm elections?

What should markets watch on Monday, 2 November?

Pressure on the US Dollar (USD) against its major peers persists 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 due in the second half of the day on the US economic calendar. Remarks from central bankers will also draw close scrutiny from market participants. The more significant event, however, is Tuesday's US midterm elections.

Safe-haven demand following the sharp technology-stock sell-off helped the USD Index finish the previous week slightly higher. That support has faded early on Monday: the USD Index is trading lower below 102.00, while US stock index futures are up between 0.4% and 0.9% for the day. At the same time, the benchmark 10-year US Treasury bond yield 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. In contrast, Iran’s Supreme Leader, Mojtaba Khamenei, instructed his senior military commanders to ready themselves for fresh confrontation with the US and Israel and broaden Tehran’s retaliatory options, despite signs of progress in diplomatic discussions from his top diplomat. Crude Oil is easing on Monday, with West Texas Intermediate (WTI) down about 2% per barrel on the day.

Could election risk limit Dollar gains as ING cautions against chasing the upside?

Near-term Dollar moves are likely to be driven more by positioning than fundamentals, according to ING analysts, who argue that the “main risk for the Dollar today is some precautionary unwinding of net-long positions ahead of Tuesday’s US midterm elections,”. They point out that “a Democratic sweep is trading around 68% in prediction markets,” and say such an 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.” With these risks in view, ING says its analysts “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 intense selling, potentially reflecting deleveraging after the equity sell-off. A decline of more than 3.5% on Friday took the metal to a one-year low near $3,870. As Monday's session gets under way, XAU/USD is staging an upward correction and changing hands above $3,900.

EUR/USD is recovering towards 1.1200 in early European trading on Monday, helped by mild weakness in the USD. German Retail Sales figures showed a monthly fall of 2% in September, reversing August's 1.2% rise. The reading undershot market expectations for a 0.4% increase.

GBP/USD is maintaining its footing just above 1.3400, with a small gain on the day following three straight trading sessions of advances. The Bank of England's monetary policy decisions are due on Thursday.

USD/JPY is edging up 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 counter disorderly moves.