US election fallout eclipses dovish RBA signals as Australian Dollar rebounds

Broad US Dollar selling following the US election results lifts AUD/USD.
Further Fed tightening remains in prospect as US economic releases signal sustained resilience.
Following Tuesday’s monetary policy decision, money markets assign a low probability to another RBA rate rise in December.

AUD/USD trades near 0.7008 at the time of writing. The pair is up 0.63% on Wednesday after reaching an intraday low of 0.6954. Pressure on the US Dollar (USD) following the US midterm election outcome is supporting the Australian Dollar (AUD). The currency is recovering from the two-week lows recorded after Tuesday’s dovish interest rate rise by the Reserve Bank of Australia (RBA).

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

With Democrats winning majorities in both chambers of Congress, Washington faces a divided government and greater political and fiscal uncertainty. Against six major peers, the US Dollar Index (DXY) stands near 101.50, around 0.35% lower on the day. US economic releases helped the index recoup part of its earlier decline to 101.21, the lowest reading since 30 September.

Private-sector job creation reached 86K in October, according to ADP, above the 69K forecast. The September gain was lowered from 90K to 86K. Meanwhile, the ISM Services Purchasing Managers’ Index (PMI) eased from 54.9 to 54.5. Although slightly short of the 54.8 estimate, the reading continued to signal expansion.

Continued action against inflation remains possible for the Federal Reserve (Fed), given the data. Elevated energy costs associated with the Middle East conflict could prolong inflation above the central bank’s 2% target. The CME FedWatch Tool puts the market-implied probability of a December rate rise at 82%.

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

25bp RBA Hike: Softer Guidance Curbs Further Tightening Bets

A 25bp increase has taken the Reserve Bank of Australia’s (RBA) cash rate to 4.85%, Commerzbank analysts note. However, the central bank “struck a less hawkish tone on further tightening.” The analysts stress that the decision was split, with “the vote…6-3”. Three members favoured leaving rates unchanged “amid concerns over rising unemployment and housing weakness.”

Limited expectations of further tightening are evident in market pricing, Commerzbank adds: “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,” highlighting that “the market is not expecting any more rate hikes by RBA.”

Nonfarm Payrolls: Key Questions Answered

Nonfarm Payrolls: What the Data Measures

Published within the US Bureau of Labor Statistics’ monthly employment report, Nonfarm Payrolls (NFP) track the change in US employment over the preceding month. Farming jobs are excluded from this component.

2% Inflation and Full Employment: NFP’s Role in Federal Reserve Policy

By indicating progress towards full employment and 2% inflation, Nonfarm Payrolls can shape Federal Reserve policy decisions. A comparatively strong NFP reading indicates that more people are working and earning more money, making higher spending likely. Conversely, a relatively weak reading could suggest difficulty finding work. When low unemployment drives high inflation, the Fed typically raises interest rates. To revive a stagnant labour market, it generally cuts them.

US Dollar: The Link With Nonfarm Payrolls

A stronger-than-expected Nonfarm Payrolls release tends to lift the US Dollar, while a weaker result usually has the opposite effect. The relationship is generally positive. This link reflects NFP’s influence on inflation, interest rates and monetary policy expectations. Stronger payroll growth normally points to tighter Federal Reserve policy, lending support to the USD.

Gold: The Impact of Nonfarm Payrolls

Gold prices typically move inversely to Nonfarm Payrolls. An above-forecast payrolls reading therefore tends to weigh on Gold, while a weaker result generally supports it. Stronger NFP usually boosts the USD. As Gold, like most major commodities, is priced in US Dollars, a stronger dollar reduces the number of Dollars needed to purchase an ounce of Gold. Higher interest rates, which stronger NFP readings typically encourage, also reduce Gold’s investment appeal relative to holding cash, which at least earns interest.

Nonfarm Payrolls: Why Markets Sometimes React Differently

Other elements of the wider employment report can overshadow Nonfarm Payrolls, which represent just one component. For example, markets have sometimes looked past the potentially inflationary implications of an above-forecast NFP result when Average Weekly Earnings fall short of expectations. Instead, they have treated the weaker earnings as deflationary. The Participation Rate and Average Weekly Hours can also shape the response, though only in rare circumstances such as the “Great Resignation” or the Global Financial Crisis.