Australian Dollar rebounds as dovish RBA signals take a back seat to US election fallout

AUD/USD advances as the US election outcome sparks widespread selling in the US Dollar.
Expectations of additional Fed tightening find support in US economic releases signalling sustained resilience.
Another RBA rate increase in December appears unlikely in money-market pricing after Tuesday’s policy announcement.

AUD/USD gains modestly on Wednesday, with broad US Dollar (USD) weakness following the US midterm election outcome lifting the Australian Dollar (AUD). The rebound takes the Aussie off the two-week lows hit after Tuesday’s dovish interest rate increase by the Reserve Bank of Australia (RBA). Having touched an intraday trough of 0.6954, the pair is trading near 0.7008 at the time of writing, a gain of 0.63% for the day.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Political and fiscal uncertainty has increased as Democrats won majorities in both chambers of Congress, paving the way for a divided government in Washington. Against a basket of six major currencies, the US Dollar Index (DXY) is trading around 101.50, roughly 0.35% lower on the day. Earlier, it touched 101.21, a low last seen on 30 September, before recouping part of its losses after the release of US economic data.

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

With the economy showing resilience, the Federal Reserve (Fed) has scope to press ahead with its inflation fight. High energy costs associated with the Middle East conflict risk prolonging price growth above the central bank’s 2% target. According to the CME FedWatch Tool, market pricing assigns an 82% probability to a rate hike in December.

Attention now turns to US Initial Jobless Claims on Thursday and the Nonfarm Payrolls (NFP) report on Friday. Traders will use these releases to judge whether labour market conditions justify a further Fed rate increase.

Does the RBA’s softer guidance signal an end to rate hikes in market pricing?

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 point to dissent within the decision, citing “the vote…6-3”. Three members favoured leaving rates unchanged “amid concerns over rising unemployment and housing weakness.”

In Commerzbank’s assessment, market pricing suggests little appetite for further tightening: “the OIS market is pricing in just 10% chance of another 25bp hike in December and just 8bp by February 2027.” The analysts also observe that “they are pricing in a rate cut of 9bp by September 2027,” reinforcing their conclusion that “the market is not expecting any more rate hikes by RBA.”

Nonfarm Payrolls: Key Questions Answered

What do Nonfarm Payrolls measure?

Within the monthly employment report published by the US Bureau of Labor Statistics, Nonfarm Payrolls (NFP) track the previous month’s change in the number of people employed across the US, excluding the farming sector.

Why do Nonfarm Payrolls matter for Federal Reserve monetary policy?

By indicating how effectively the Federal Reserve is fulfilling its mandate of full employment and 2% inflation, the Nonfarm Payrolls reading can shape its policy decisions. When NFP is relatively high, more people are working and earning more money, which probably translates into higher spending. A relatively weak reading, by contrast, may suggest that people are finding it difficult to secure work. To counter high inflation arising from low unemployment, the Fed generally increases interest rates. When the labour market stagnates, it typically cuts rates to encourage activity.

How does the US Dollar respond to Nonfarm Payrolls?

The US Dollar typically strengthens when Nonfarm Payrolls exceed forecasts and weakens when they fall short, reflecting a generally positive correlation between the two. This relationship operates through the impact of NFP on inflation, monetary policy expectations and interest rates. A stronger NFP reading usually points towards tighter Federal Reserve policy, lending support to the USD.

What is the link between Nonfarm Payrolls and Gold prices?

Gold prices typically move inversely to Nonfarm Payrolls. An above-forecast payrolls reading therefore tends to weigh on Gold, while a weaker-than-expected result tends to have the opposite effect. Stronger NFP generally supports the USD. Since Gold, like most major commodities, is quoted in US Dollars, a rise in the currency’s value reduces the number of Dollars needed to purchase an ounce of Gold. Higher NFP readings also typically contribute to higher interest rates. This makes Gold less appealing as an investment relative to holding cash, which can at least earn interest.

Why can markets react to Nonfarm Payrolls in an unexpected way?

Other elements of the broader employment report can outweigh Nonfarm Payrolls, which represent just one component. For instance, markets have sometimes looked past the potentially inflationary implications of an above-forecast NFP reading when Average Weekly Earnings have missed expectations. Instead, they have viewed the decline in earnings as deflationary. Participation Rate and Average Weekly Hours figures can also shape market responses, though this occurs only in exceptional circumstances such as the “Great Resignation” or the Global Financial Crisis.