A lame duck session in Congress is coming up. Realistically, it will last for the rest of Trump’s term.

Other Things More Important

FXSTREET asked me my opinion on the Midterm election and what it meant for the dollar.

I replied that Tariffs, Iran, ECB actions, and Fed actions were more important. So are Brexit and the budget confrontation in Italy.

The term “lame duck Congress” typically means the period between mid-term elections and when the new Congress is seated on January 6.

But if the Democrats take control of the House, which is very likely, little significant legislation will pass for the remaining two years of Trump’s Term.

The open feud between Democrats and Republicans will stall nearly everything.

Congressional Makeup

I expect the Democrats will flip the house by a small margin and will do better than expected in the Senate. As of Oct 22, the Real Clear Politics base scenario is the Democrats lose 2 Senate seats. I think it is more likely the status quo holds or the Democrats lose just one seat. Democrats may even pick up a seat if Nevada goes their way.

I have Florida, Indiana, Missouri, Arizona, and Montana in the Democrat Senate column. If the Democrats win either the house or Senate, Congress becomes a two-year lame-duck session for fiscal policy.

There will not be another tax cut nor much of anything else.

What’s Priced In?

I suspect a Democrat flip is priced in, and accurately so. There may not be stomach for a second set of tax cuts anyway, unless there is a Senate blowout.

I suggest is not what Congress does that is meaningful, but rather what the ECB does, what Trump does with tariffs, what Trump does with Iran, and what the Fed does with interest rates that matters most. In a vacuum, Fed hikes are dollar-supportive. However, this isn’t a vacuum. Even if the Fed hikes, if they hike slower than expected, it would tend to weaken the dollar.

As of October 23, the market thinks there is a 78.8% chance of a hike in December with a 53.8% chance of another hike in March. If either of those do not happen, look for the dollar to weaken. Housing is faltering now. Homebuilders are getting clobbered. I suspect that March hike may not happen. Heck, the December hike my not happen.