Australian Dollar rebounds as dovish RBA signals are eclipsed by US election fallout

• Following the US election results, broad US Dollar weakness lifts AUD/USD.
• Resilient US economic figures reinforce expectations that the Fed will tighten policy further.
• Following Tuesday’s monetary policy announcement, money markets assign a low probability to a further RBA rate rise in December.

Following Tuesday’s dovish interest rate increase by the Reserve Bank of Australia (RBA), the Australian Dollar (AUD) is recovering from two-week lows as the US midterm election result puts pressure on the US Dollar (USD). AUD/USD is edging up on Wednesday, trading at around 0.7008 at the time of writing. That leaves the pair 0.63% higher on the day, having earlier touched an intraday low of 0.6954.

With Democrats winning majorities in both chambers of Congress, Washington faces a divided government and greater political and fiscal uncertainty. Against six major counterparts, the US Dollar Index (DXY) stands near 101.50, a decline of around 0.35% on the day. US economic releases helped the index regain some ground after it dropped to 101.21, its weakest level since 30 September.

Private-sector employment rose by 86K in October, according to ADP, beating the 69K forecast. The September gain, meanwhile, was revised to 86K from 90K. In a separate release, the ISM Services Purchasing Managers’ Index (PMI) eased from 54.9 to 54.5. Although marginally below expectations of 54.8, the reading continued to signal expansion.

With energy costs elevated by the Middle East conflict threatening to keep inflation above the 2% target for longer, these figures leave the Federal Reserve (Fed) scope to press ahead with its efforts to curb price growth. The CME FedWatch Tool puts the market-implied probability of a December rate rise at 82%.

To judge whether labour market conditions warrant another Fed rate increase, traders are looking ahead to Thursday’s US Initial Jobless Claims and Friday’s Nonfarm Payrolls (NFP) report.

Markets scale back RBA tightening bets as softer guidance offsets rate rise

A 25bp increase has taken the Reserve Bank of Australia’s (RBA) cash rate to 4.85%, Commerzbank analysts observe, although the central bank “struck a less hawkish tone on further tightening.” The analysts also draw attention to the split decision, describing “the vote…6-3”, with three members favouring unchanged rates “amid concerns over rising unemployment and housing weakness.”

Limited expectations of further tightening are now evident in market pricing, Commerzbank says, noting that “the OIS market is pricing in just 10% chance of another 25bp hike in December and just 8bp by February 2027.” The analysts further observe that “they are pricing in a rate cut of 9bp by September 2027,” reinforcing their view that “the market is not expecting any more rate hikes by RBA.”