The Australian dollar has failed to capitalise on a weaker US dollar and falling Treasury yields as prediction markets price in a near-certain Democratic sweep of Congress. With Wall Street futures under pressure, bearish AUD/USD options positioning and narrowing yield spreads suggest risk aversion remains the dominant force.
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Why AUD/USD Is Struggling as US Midterms Weigh on the Dollar
US Midterms: Democrats Near Sweep as Dollar and Yields Slip
Prediction markets are pricing a near-certain Democratic sweep of Congress following early US midterm election results. Bloomberg's aggregation of Kalshi and Polymarket shows Democrats with a 99% probability of taking the Senate and 99.6% for the House. While the overall results are yet to be confirmed, a Democratic-controlled Congress would significantly constrain President Trump's legislative agenda over the remaining two years of his presidency.
Source: Traderinput.com
US Dollar: Fiscal Gridlock Weighs on Yields
A Democratic sweep would make further fiscal expansion and tax cuts more difficult to implement, potentially reducing government borrowing expectations and Treasury yields. This removes a potential source of support for the US dollar, with the US dollar index (DXY) already down 0.4% during today's session.
Treasury yields have also retreated across the curve, with the 10-year yield falling around four basis points. Shorter-dated yields have led the decline from their October highs, allowing the yield curve to steepen modestly. The 10-year/2-year spread has widened to around 33 basis points, while the 30-year/2-year spread sits near 72 basis points.
Source: TradignView
Fed Rate Pricing Still Points to Further Tightening
Fed expectations have also shifted lower. The market-implied rate path is now around 40 basis points below last week's levels for November, with the difference narrowing to around 25–30 basis points in early 2027. However, markets are still pricing further tightening into next year, suggesting a reassessment of the pace of future hikes rather than a shift towards rate cuts.
With a Democratic sweep now heavily priced in, further dollar weakness may require a sustained decline in Treasury yields and additional dovish repricing of Fed expectations.
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Wall Street: Mixed Implications for Equities
Political gridlock could limit further fiscal stimulus and slow Trump's deregulation agenda, while increased congressional scrutiny could weigh on technology and AI-related stocks.
However, lower Treasury yields could support equity valuations, particularly growth stocks. For now, risk-off sentiment appears to be dominating, with Nasdaq 100 futures down 1.9%, the S&P 500 down 1.1% and Dow Jones down 0.7%. All three are trading below their respective 50-day EMAs, suggesting the recent selloff could extend further.
Beyond the elections, Wall Street's direction is likely to remain driven by corporate earnings, economic growth and developments in the AI investment cycle.
AUD/USD Fails to Capitalise on Weaker US Dollar
The Australian dollar has struggled to capitalise on broad US dollar weakness, despite falling Treasury yields and a dovish repricing of Fed expectations.
Instead, risk-off sentiment appears to be dominating, with the sharp selloff across Wall Street futures weighing on risk-sensitive currencies such as AUD. The Aussie's failure to rally against a weaker greenback suggests underlying demand remains fragile, despite the RBA's recent rate hike. Note that risk reversals are pointing lower as options traders demand for puts outpaces demand for calls. While the AU-US2yr spread remains elevated, it too has curled lower.
Unless risk appetite improves, AUD/USD could remain vulnerable to further downside, particularly if the US dollar begins to recover.
Source: ICE, TradingView
Market Takeaway: Yields and Risk Appetite Remain in Focus
With a Democratic sweep now largely priced in, the next move in financial markets may depend more on Treasury yields and risk appetite than the election results themselves.
Further declines in US yields could provide opportunities to sell into US dollar rallies, particularly if markets continue to scale back Fed tightening expectations. However, continued weakness on Wall Street could favour defensive currencies over the Australian dollar, making AUD/USD a less straightforward expression of USD weakness.
