Markets had expected Democrats' midterm wins to boost risk appetite. Instead, the S&P 500 and the Nasdaq Composite recorded their largest single-day market-cap declines in history.

On the first day after the election, investors thought a divided government might be good for the economy. By day two, they changed their minds. Democratic control of Congress was read as a business risk, prompting a rush into the greenback and driving EUR/USD off the upper edge of its 1.115–1.124 trading band.

Nasdaq 100 and Treasury yield dynamics

The equity sell-off is a clear negative for EUR/USD because it signals a fresh bout of liquidity stress. Investors are selling assets to raise cash and hedge political risk, and are buying US Treasuries aggressively. Falling yields conflict with the apparent strength of the US economy, leaving the market's next move unclear.

What supports the dollar is a Citigroup economic surprise index running hotter on strong employment prints, jobless claim data, and productivity gains hitting one-year highs. Coupled with hawkish Fed rhetoric, including vocal support for high interest rates from Cleveland Fed President Beth Hammack and Richmond Fed President Tom Barkin, the evidence suggests the dollar's policy advantages remain intact.

Economic surprise index and Treasury yields

Context matters. The US economy looks stronger than others, and slowing it will take time and likely require Democrats to successfully curb AI investment — a doubtful prospect given the president's veto power.

A politically weakened Donald Trump historically correlated with a more hawkish Fed and a stronger dollar. The dollar had occasionally softened on fears around Trump's foreign policy agenda (tariffs, Greenland talk), but later recovered. The Republicans' midterm losses free Fed Chair Kevin Warsh to take a tougher stance on inflation.

Transatlantic divergence is expected to persist. Traders are pricing in two Fed rate hikes by mid-next year and a roughly 50% chance of a third move. Standard Chartered calls the dollar the strongest G10 currency and expects the US to outperform energy-dependent Europe, while acknowledging the political risks from Washington.

Thus, dollar support comes from US resilience and expected Fed tightening. Any dollar weakness driven by politics will likely be temporary.

Technically, the daily chart shows that EUR/USD is forming an expanding wedge pattern. A rebound off fair value near 1.1190 would be a buying opportunity, while a break below 1.1165 would be a trigger to sell.