Forex Today: Post-election USD weakness persists, focus shifts to BoE rate call

Here is what you need to know on Thursday, November 5:

The selling pressure surrounding the US Dollar (USD) following the midterm election result persists on Thursday, with the USD Index extending its slide toward 101.00 in the early European session. Later in the day, the Bank of England (BoE) will announce its monetary policy decisions and Bank of England (BoE) Governor Andrew Bailey will speak on the policy outlook and respond to questions in a press conference starting at 12:30 GMT.

The USD weakened against its major rivals midweek as markets reacted to Democrats winning the majority in both the Senate and the House. Crude Oil prices declined sharply on renewed optimism about a de-escalation of the conflict in the Middle East, and Wall Street's main indexes staged a risk rally following the opening bell. Meanwhile, the data published by Automatic Data Processing (ADP) showed that employment in private sector increased by 86K in October, surpassing the market expectation of 69K. Additionally, the Institute for Supply Management's (ISM) Services Purchasing Managers' Index (PMI) arrived at 54.5, pointing to an expansion at a healthy pace in the service sector's economic activity.

Analysts at Scotiabank suggest that the latest bout of G10 Dollar weakness is best understood as “something of a ‘relief rally’” following recent political and market developments. They argue that the move also marks “a shift in the USD toward the middle of its ‘smile’, in which relative growth and interest rate differentials narrow as the US/USD drift from the edge linked to exceptionalism – with the other edge of the smile tied to sentiment-driven risk aversion.” In their view, this transition away from the extremes of the so‑called Dollar smile helps explain why higher‑beta currencies have been able to outperform as immediate tail risks recede.

GBP/USD gained nearly 0.4% on Wednesday and touched its highest level since mid-September slightly above 1.3500. The pair stays in a consolidation phase at around 1.3480 in the European morning on Thursday. Investors expect the BoE to raise the policy rate by 25 basis points (bps) to 4%.

Societe Generale’s Kit Juckes cautions that Sterling’s recent resilience could prove fragile if the BoE’s communication turns less forceful. He argues that “if the Bank of England’s guidance on Thursday shows any hesitation about how much further they need to go, the Pound could start looking vulnerable,” even though, in his view, “it is probably too early for them to give the appearance of slowing down.”

Gold (XAU/USD) responded positively to the US midterm elections outcome on Wednesday and gained more than 3%. XAU/USD carries its bullish momentum over to Thursday and trades above $4,100, rising about 1.5% in the European morning.

EUR/USD benefits from broad USD weakness and trades in positive territory at around 1.1250 on Thursday. The European economic calendar will feature Producer Price Index data for September later in the day. Additionally, European Central Bank President Christine Lagarde will participate in a discussion at the event titled "New Dialogues for the Future" in Milan, Italy.

USD/JPY registered marginal losses on Wednesday and continues to edge lower toward 158.00 in the European session. In the early trading hours of the Asian session on Friday, September Labor Cash Earnings data from Japan will be watched closely by investors.