The U.S. dollar retreated on Monday amid political uncertainty ahead of Tuesday’s presidential election and also amid expectations that the Federal Reserve will cut interest rates this week.

The dollar index, which analyzes the greenback against a basket of six other currencies, fell 0.5% to 103.695, after strong gains in October.

Dollar slips ahead of U.S. elections 

At the beginning of this week, attention is focused on the U.S. presidential election scheduled for Tuesday, in which the race between the Republican Party candidate and former president, Donald Trump, and his Democratic rival, Vice President Kamala Harris, is very tight.

However, Harris received a noticeable boost when a respected poll in the generally conservative-leaning state of Iowa found her leading Trump by three percentage points, thanks in large part to support among women.

“Markets are apparently scaling back some Trump trading,” mentioned analysts at ING, in a note, ”and we suspect the next two days may see some abnormal swings in USD crosses due to tighter volatility conditions ahead of a hotly contested and highly binary U.S. election.”

Analysts think Trump’s policies on immigration, tax cuts and tariffs would move inflation, the dollar and bond yields higher.

In addition, markets were also positioning themselves positively for a 25 basis point cut by the Fed at the end of its latest two-day policy meeting next week, following the Fed’s decision to roll out a 50 basis point reduction in September.

Friday’s nonfarm payrolls report revealed a dramatic slowdown in job creation during October, although the release was affected by labor disputes and hurricanes.

“Had it not been for the proximity of the vote, we would have argued that a Fed cut would have been net negative for the dollar, but the FX implications of this Fed decision will only be assessed once election volatility has subsided,” ING added.

Euro rallies on improved eurozone data

In Europe, EUR/USD rose 0.5% to 1.0892, benefiting from a weaker dollar and recent data with a positive tone.

The latest Eurozone manufacturing PMI release saw an increase to 46.0 in October, up from 45.0 last month, according to data released early Monday. Although this data reveals that the sector remains in contractionary territory, it appears that some light may be on the horizon.

“Markets have reduced some pessimistic ECB bets following the latest eurozone growth and inflation figures, but are probably still open to reassessing the possibility of a 50 basis point cut in December if Trump wins this week,” ING added. “The reasoning there is that the ECB will be more inclined to frontload easing given the risk of protectionism under Trump.”

GBP/USD was up 0.3% at 1.2963, bouncing back from the previous week’s losses in the wake of the New Labour government’s budget.

The Bank of England has its meeting scheduled for Thursday and is expected to cut 25 basis points, although this decision has been complicated by a massive sell-off in gilts following the previous week’s budget.

“Markets are likely to be more interested in hearing what the MPC has to say about last week’s budget,” ING mentioned, given that the ”Office for Budget Responsibility views the announced fiscal measures as both pro-growth and inflationary.”

The yen rebounds from three-month lows

USD/JPY was down 0.6% at 152.11 retreating from recent three-month highs on the back of dollar weakness. The yen also benefited from a somewhat hawkish message from the Bank of Japan the previous week.

USD/CNY is down 0.3% to 71.009 and attention is focused on the NFP Standing Committee meeting that starts on Monday.

The NPC is expected to mark plans for more fiscal spending, with recent reports indicating that the body could greenlight $1.4 trillion in additional debt over the next few years.