Democrats Sweep Congress, Stocks Rebound And Dollar Sinks — Whats Really Being Repriced?

Dollar Index Dropped 0.6% Toward 101.27, Weakening Against All Seven Other Major Currencies as US Equity Futures Staged a Sharp Recovery from Overnight Election-Driven Losses

What’s happening: Dollar fell to a one-month low on Wednesday as markets reassessed Democratic control of Congress. Dollar Index dropped 0.6% toward 101.27, weaker against all seven other major currencies, while the US 10-year yield declined about 5bps toward 4.917% and the 2-year eased about 3bps to 4.602%. US equity futures recovered sharply from overnight election-driven losses, led by traditional sectors rather than technology.

Why it matters: December Fed hike expectations have barely changed, at approximately 79.2% against 77.4% at Tuesday’s settlement. The adjustment therefore appears to reflect the longer-term consequences of divided government, namely reduced fiscal stimulus expectations and uncertainty over AI infrastructure, rather than the next Fed decision. Euro and New Zealand Dollar gains owe more to broad Dollar weakness than to overseas fundamentals.

Dollar fell to a one-month low on Wednesday as financial markets reassessed the implications of Democratic control of Congress for US fiscal policy, Treasury yields and the AI investment outlook. Dollar Index dropped 0.6% toward 101.27, weakening against all seven other major currencies, even as US equity futures staged a sharp recovery from their overnight election-driven losses. The rebound, however, was led by traditional sectors rather than technology, suggesting that investors were rotating exposure rather than embracing a uniform return to risk.

The combination of falling Treasury yields, a weaker Dollar and recovering equities is particularly notable because expectations for another Fed rate hike in December have barely changed. CME FedWatch pricing placed the probability of a December increase at approximately 79.2%, compared with 77.4% at Tuesday’s settlement. The immediate market adjustment therefore appears less about the next Fed decision than the potential longer-term consequences of divided government, reduced fiscal stimulus expectations and greater uncertainty surrounding AI infrastructure development.

At the same time, Euro has strengthened against Dollar as Eurozone inflation reached 4.0%, reinforcing expectations for another ECB hike. New Zealand Dollar has performed even better, despite an unexpectedly weak employment report that complicates RBNZ’s tightening outlook. The contrast across currencies reinforces the impression that broad Dollar weakness, rather than a synchronized improvement in overseas economic fundamentals, is dominating the FX market response.

Follow the Democratic sweep, Dollar’s one-month low and the sector rotation on the ActionForex Telegram channel.

Divided Government Changes Fiscal Expectations, Not Immediate Fed Pricing

The Democratic sweep of Congress represents a significant change in Washington’s political landscape, with election-night projections indicating that the party has gained control of both the House of Representatives and Senate.

The implications for financial markets are more complicated than a straightforward partisan interpretation.

President Donald Trump retains the White House, while the new congressional balance creates greater obstacles to additional fiscal legislation. Investors are consequently reassessing the likelihood of further stimulus measures and the potential implications for federal borrowing, economic growth and Treasury issuance.

The immediate market interpretation is that divided government could constrain the scope for additional fiscal expansion, reducing some of the upward pressure previously associated with Treasury yields and Dollar.

That helps explain why the US 10-year yield declined approximately 5bps toward 4.917%, while the 2-year yield eased around 3bps to 4.602%.

The relationship is not automatic. Divided government does not guarantee a reduction in deficits, and existing spending commitments, debt-limit negotiations and legislative compromises could complicate the fiscal outlook. Nevertheless, the election changes expectations about what additional measures may be politically achievable.

Deutsche Bank’s Jim Reid linked the Treasury rally to reduced prospects for fiscal stimulus under divided government, while Saxo’s Charu Chanana also highlighted the potential implications of a stronger Democratic showing for future fiscal policy.

Importantly, the decline in yields has not been accompanied by a substantial retreat in expectations for the Fed’s next rate increase.

CME FedWatch showed a 79.2% probability of a December hike, marginally above Tuesday’s 77.4%. Meanwhile, the amount of additional tightening priced through June 2027 reportedly declined by approximately 3.3bps.

The distinction suggests that investors are reassessing the policy and growth outlook further ahead, without significantly changing their expectations for the December meeting.

Dollar’s weakness should therefore not be interpreted as a market decision to abandon expectations for another Fed hike. Rather, the currency is reacting to a broader adjustment in fiscal and medium-term interest-rate expectations, even as the near-term policy outlook remains relatively stable.

Whether that interpretation persists will depend on incoming US economic data and the extent to which lower Treasury yields are sustained.

Stocks Rebound, but the AI Trade Is Not Leading the Recovery

Equity markets have undergone an equally dramatic reversal.

US futures initially fell sharply as election results emerged, with Nasdaq-100 futures dropping to 27,615.75, their lowest level since late July. The index subsequently recovered more than 900 points from its overnight low as selling pressure eased.

However, the recovery became increasingly uneven as Wednesday progressed.

By the latest pre-market snapshot, Dow futures were up approximately 1.8%, S&P 500 futures had gained 0.9%, while Nasdaq futures were only marginally higher.

European equities also rallied, with DAX and CAC 40 advancing around 1.7% and 1.9%, respectively. Hong Kong’s Hang Seng gained approximately 1.7%, while South Korea’s KOSPI recovered from earlier weakness.

Japan’s Nikkei provided a more dramatic example of the initial reaction, plunging as much as 4.8% before recovering to finish down 1.42%.

• Nasdaq-100 futures: fell to 27,615.75, lowest since late July, then recovered more than 900 points
• Dow futures: up approximately 1.8%
• S&P 500 futures: up 0.9%
• Nasdaq futures: only marginally higher
• DAX and CAC 40: up around 1.7% and 1.9%
• Hang Seng: up approximately 1.7%
• Nikkei: down as much as 4.8% before finishing down 1.42%

The divergence between the Dow and Nasdaq suggests that the recovery is being driven partly by a rotation between sectors in response to the changing political outlook, rather than a wholesale restoration of confidence in AI-related investments.

Renewable-energy and healthcare shares were among the beneficiaries, while selected data-centre and AI infrastructure companies continued to underperform.

The regulatory implications of the election are particularly relevant to Texas, which accounts for approximately 27% of planned US data-centre capacity, according to Wells Fargo estimates.

The election of Democratic Governor Gina Hinojosa has drawn attention to proposals for restrictions on data-centre development and changes to tax incentives. Similar political developments in other important states have added to uncertainty over the future pace of AI infrastructure expansion.

However, potential regulatory changes are not equivalent to immediate restrictions on investment.

Federal legislation would still face the possibility of a presidential veto, while state-level proposals would require implementation before affecting construction activity and corporate spending.

These uncertainties nevertheless arrive at a sensitive moment for the AI sector.

Investors were already questioning the financing requirements, valuations and expected returns associated with the rapid expansion of data centres. Oracle’s recently announced $20 billion equity and debt financing plan had intensified scrutiny of the capital needed to sustain the investment cycle.

The election may therefore be adding a regulatory concern to an existing reassessment of AI-related investment rather than creating an entirely new source of market weakness.

The recovery in broader equities, alongside continued caution toward AI infrastructure companies, suggests that investors are distinguishing between sectors that may benefit from the election and those facing additional uncertainty.

Whether this rotation develops into a sustained trend will become clearer once US cash markets respond fully to the election results.

Euro Gains as Inflation Reinforces ECB Tightening Expectations

Euro has been among the stronger major currencies, with EUR/USD advancing approximately 0.65% toward 1.1264.

The move coincided with Eurozone headline inflation accelerating from 3.8% to 4.0% yoy in October, twice ECB’s target and matching market expectations.

Energy inflation remained the dominant source of price pressure, rising from 18.9% to 20.8%. Core inflation, however, held unchanged at 2.5%, while services inflation edged up from 3.2% to 3.3%.

• Headline inflation: 3.8% to 4.0% yoy in October, matching expectations
• Energy inflation: 18.9% to 20.8%
• Core inflation: unchanged at 2.5%
• Services inflation: 3.2% to 3.3%

The composition indicates persistent above-target inflation without a comparable new acceleration in underlying price pressures.

Nevertheless, the elevated headline figure reinforces expectations that ECB will resume tightening in December.

Bundesbank President Joachim Nagel said this week that “an interest rate hike in December is very likely necessary”, unless the inflation outlook improves significantly. Bulgarian central bank Governor Dimitar Radev also emphasized that October’s pause did not signal the end of monetary tightening.

Market pricing reflects the hawkish outlook.

The overnight-indexed-swap snapshot indicated approximately a 90.8% probability of a 25bps December increase, with the ECB deposit rate currently at 2.50% and the implied rate reaching approximately 3.14% by October 2027.

That provides a supportive interest-rate backdrop for Euro.

However, the currency’s advance should not be attributed primarily to the inflation release itself. The headline and core figures matched expectations, while Dollar weakened against every major counterpart.

There is also a growing tension between inflation and economic activity.

Eurozone PMI Composite declined from 53.1 to 51.7 in October, with new business growth approaching stagnation and business confidence weakening.

Euro therefore benefits from a relatively firm ECB tightening outlook, but the latest currency move appears primarily driven by broad Dollar weakness rather than a fresh upside inflation surprise.

The increasingly sluggish growth backdrop could also complicate the case for sustained tightening beyond December, particularly if underlying inflation remains relatively stable.

Kiwi Leads FX Gains Despite Weak Employment Data

New Zealand Dollar has delivered an even more striking divergence between domestic fundamentals and currency performance.

NZD/USD climbed approximately 0.93% toward 0.5638, making Kiwi the strongest major currency on the ActionForex heat map.

Yet New Zealand’s latest employment report was significantly weaker than expected.

The unemployment rate increased from 5.6% to 5.7% in Q3, its highest level since 2015, exceeding both market expectations and RBNZ’s forecast of 5.5%.

Employment contracted 0.1% qoq, against expectations of a 0.4% increase, while the employment rate declined from 66.7% to 66.4%.

The underlying composition was also weak. Full-time employment fell by 17,000, partly offset by 15,000 additional part-time positions. Actual hours worked declined 1.6%, although holiday timing contributed to the fall.

• Unemployment rate: 5.6% to 5.7% in Q3, highest since 2015, against RBNZ forecast of 5.5%
• Employment: down 0.1% qoq, against expectations of a 0.4% increase
• Employment rate: 66.7% to 66.4%
• Full-time employment: down 17,000
• Part-time employment: up 15,000
• Actual hours worked: down 1.6%, with holiday timing contributing

These developments complicate the outlook for RBNZ, which held its Official Cash Rate at 2.75% last week in a narrow 4–3 decision while leaving further increases possible.

Westpac economist Kelly Eckhold considered the employment report weaker than both the bank’s and RBNZ’s expectations. He maintained that another increase in December remained more likely than not, but acknowledged that the deterioration strengthened the argument for policymakers favouring a pause.

The distinction between the timing of the next increase and the eventual peak in rates is important. Weaker employment could encourage RBNZ to wait longer without necessarily establishing that the tightening cycle has ended.

Kiwi’s strength therefore appears to reflect the broader weakness in US Dollar rather than a positive reassessment of New Zealand’s economic outlook.

The currency initially weakened following the labour-market release before recovering as Dollar selling became more widespread.

This is an important reminder that even substantial domestic economic surprises can be overshadowed by global currency flows when markets are responding to a major political or macroeconomic development.

Stronger US Data Is the Early Test for the Dollar Decline

Wednesday’s market response suggests that investors are reassessing the consequences of divided government across several asset classes.

Treasury yields have declined as expectations for additional fiscal stimulus become less certain. Dollar has weakened broadly, while equity markets have recovered through a rotation toward sectors perceived as potential beneficiaries of the new political landscape.

At the same time, caution toward AI infrastructure investment persists, highlighting the distinction between a broader equity rebound and renewed confidence in the technology sector.

The crucial point is that December Fed hike expectations have remained largely intact. Dollar weakness is therefore better understood as a potential repricing of the medium-term fiscal and growth outlook than as an immediate reversal in monetary-policy expectations.

The next US economic releases will test that interpretation.

October ADP private employment increased by 86,000, above expectations of 67,000, suggesting that hiring held up better than anticipated. ISM Services is due later Wednesday, while Friday’s nonfarm payrolls report will provide a more comprehensive assessment of labour-market conditions.

Strong economic data could restore some support to US yields and Dollar, particularly if investors conclude that the economy remains resilient enough to sustain further monetary tightening.

Meanwhile, the US equity market’s reaction to the election results will help determine whether AI-related concerns remain concentrated or spread more broadly.

For now, the Democratic sweep appears to be reshaping expectations for fiscal policy, longer-term yields and sector performance more than the immediate Fed outlook. Whether that repricing develops into a sustained Dollar decline will depend on how political expectations interact with economic data and the eventual policy decisions emerging from Washington.

Related Coverage

US, Eurozone and UK Data

• US ADP Employment Rises 86K in October as Job Growth Holds Up Better Than Expected: private-sector employment increased by 86,000, exceeding market expectations of 67,000 and slightly below September’s 90,000, suggesting hiring continued at a moderate but broadly steady pace. ADP also reported annual base pay growth of 3.2% and gross pay growth of 4.7%, though comparable September figures were unavailable. The upside surprise offers some reassurance ahead of Friday’s nonfarm payrolls, but the modest pace does not signal a decisive acceleration and ADP results do not necessarily predict government payroll figures.
• Eurozone CPI Hits 4.0% as Energy Inflation Surges, But Core Holds at 2.5%: inflation accelerated from 3.8% to 4.0% yoy in October, twice ECB’s target, as annual energy inflation surged to 20.8%, while core CPI remained unchanged at 2.5% and inflation excluding energy held steady at 2.3%. Services, food and industrial goods inflation edged higher, but by considerably less than energy prices, and trends diverged across major economies, with Italy rising sharply while Germany eased. The figures reinforce concerns about persistent inflation but provide limited evidence of a substantial new acceleration in underlying price pressures.
• Eurozone PMI Composite Falls to 51.7 as Demand Weakens and Business Confidence Slips: private-sector growth slowed to a four-month low in October, with PMI Composite falling from 53.1 to 51.7 and PMI Services declining from 53.0 to 51.4. New business growth approached stagnation, services orders declined and employment weakened, while business confidence fell to its lowest level since May and France returned to contraction. Composite input cost inflation accelerated to a five-month high even as services price pressures eased slightly, complicating the outlook and raising questions about further ECB tightening.
• UK PMI Composite Rises to 52.9 as Hiring Returns, but Inflation Pressures Intensify: private-sector growth accelerated to an eight-month high in October, with PMI Composite rising from 52.0 to 52.9 and PMI Services from 52.1 to 52.8, supported by stronger domestic demand, improving new orders and AI-related investment spending. Employment returned to growth for the first time in 25 months and business confidence improved, although hiring remained cautious. Services input cost inflation reached a five-month high on higher energy, transportation and wage expenses, reinforcing attention on BoE’s November policy decision.

Asia-Pacific Markets and Data

• Nikkei Plunges After US Midterms, Then Rebounds — Knee-Jerk Reaction or AI Reset?: Nikkei plunged as much as 4.84% to 60,030 after the US midterm elections, then staged a dramatic recovery that reduced its losses to around 1.8%. Projected Democratic gains raised concerns about tighter regulation of AI infrastructure, particularly data-centre development in Texas, adding to existing worries over AI financing and valuations, and Japanese semiconductor shares suffered heavy losses while other Asian markets stabilized. Nikkei is approaching critical support at 59,072–59,332, and a recovery above 64,831 would strengthen the case for a completed correction; whether the plunge was an overreaction or the start of a larger AI reset remains open.
• Australia Household Spending Rises 0.6%, But Essential Expenses Lead the Gains: household spending increased 0.6% in September, with annual growth reaching 6.8%, while inflation-adjusted volumes rose 0.7% in Q3 for a fourth consecutive quarterly gain. Non-discretionary spending climbed 1.2%, substantially outpacing the 0.3% rise in discretionary purchases, while services increased 1.1% and transport and health led the monthly gains. The figures indicate continued resilience in household demand despite restrictive financial conditions, but less convincing evidence of a sustained acceleration in discretionary consumption.
• Australia PMI Composite Drops to 48.2 as Services Contracts and Inflation Pressures Rise: the private sector returned to contraction in October, with PMI Composite falling from 51.3 to 48.2 and PMI Services declining from 51.9 to 48.5, its first contraction since May. New business continued growing modestly, but higher interest rates, subdued confidence and operational constraints weighed on activity, while services firms resumed hiring as backlogs accumulated at their fastest pace since May 2022. Input cost inflation reached a five-month high and selling price inflation accelerated despite weaker output, highlighting slowing activity yet persistent inflation pressures at the start of Q4.
• NZ Unemployment Hits 11-Year High as Jobs and Hours Worked Fall, Challenging RBNZ Hike Outlook: the unemployment rate rose from 5.6% to an 11-year high of 5.7% in Q3, exceeding both market expectations and RBNZ’s forecast. Employment unexpectedly contracted by 0.1%, full-time positions fell by 17,000, actual hours worked dropped 1.6% and private-sector wage growth moderated, adding to evidence of weakening labour demand. The figures complicate RBNZ’s tightening outlook after last week’s hold at 2.75%, and although inflation risks persist, the deterioration strengthens the case for assessing existing monetary restraint before another increase.
• China Services PMI Slows to 50.8 as Rising Costs and Price Cuts Squeeze Margins: RatingDog PMI Services declined from 51.6 to 50.8 in October, below expectations of 51.5, while PMI Composite eased from 52.4 to 52.0. Services new orders continued expanding at a solid pace and hiring accelerated, and firms reduced backlogs for the first time in a year, helped by additional staffing and reported AI-enabled efficiencies. However, input cost inflation reached a five-month high even as companies cut selling prices for a second consecutive month, highlighting growing pressure on profitability despite continued expansion.

FAQ

Why did Dollar fall to a one-month low when December Fed hike expectations barely changed?

The adjustment appears to reflect the longer-term consequences of divided government, namely reduced expectations for additional fiscal stimulus and greater uncertainty over AI infrastructure, rather than the next Fed decision. The US 10-year yield fell about 5bps toward 4.917% and the 2-year about 3bps to 4.602%, yet CME FedWatch put the December hike probability at about 79.2%, against 77.4% at Tuesday’s settlement. Dollar Index dropped 0.6% toward 101.27, so the weakness should not be read as abandoning expectations for another Fed hike.

Why is the equity rebound not being led by technology?

Investors appear to be rotating between sectors rather than restoring confidence in AI-related investment. Dow futures were up about 1.8% and S&P 500 futures 0.9%, while Nasdaq futures were only marginally higher after Nasdaq-100 futures fell to 27,615.75, their lowest since late July. Renewable-energy and healthcare shares benefited, while selected data-centre and AI infrastructure companies underperformed amid regulatory uncertainty, with Texas accounting for about 27% of planned US data-centre capacity.

Why did Euro and Kiwi gain despite soft domestic data?

Both moves appear driven mainly by broad Dollar weakness. EUR/USD rose about 0.65% toward 1.1264 even though Eurozone inflation of 4.0% and core of 2.5% matched expectations and PMI Composite fell from 53.1 to 51.7. NZD/USD climbed about 0.93% toward 0.5638, the strongest on the heat map, despite unemployment rising to 5.7%, its highest since 2015, and Kiwi initially weakened after the report before Dollar selling spread.

Key Takeaways

1. Dollar fell to a one-month low on Wednesday, with Dollar Index down 0.6% toward 101.27 and weaker against all seven other major currencies.
2. The US 10-year yield fell about 5bps toward 4.917% and the 2-year about 3bps to 4.602%, yet the December hike probability was about 79.2% against 77.4% at Tuesday’s settlement, suggesting a repricing of the medium-term fiscal and growth outlook rather than the next Fed decision.
3. With Democrats winning control of both chambers and Trump retaining the White House, investors are reassessing the scope for additional fiscal stimulus, a link Deutsche Bank’s Jim Reid drew to the Treasury rally.
4. Nasdaq-100 futures fell to 27,615.75, their lowest since late July, then recovered more than 900 points, but Dow futures rose about 1.8% and S&P 500 futures 0.9% while Nasdaq futures were only marginally higher, pointing to sector rotation.
5. Regulatory risk to data centres, with Texas at about 27% of planned US capacity per Wells Fargo, arrives as Oracle’s $20 billion financing plan intensifies scrutiny, though regulatory changes are not equivalent to immediate investment restrictions.
6. EUR/USD rose about 0.65% toward 1.1264 and overnight-indexed swaps priced about a 90.8% chance of a December ECB hike after 4.0% inflation, but the move appears driven mainly by Dollar weakness as PMI Composite fell to 51.7.
7. NZD/USD climbed about 0.93% toward 0.5638 despite unemployment rising to 5.7%, while ADP employment of 86,000 above the 67,000 expected and Friday’s payrolls will test whether the Dollar decline survives stronger US data.

What to Watch Next

The first test is ISM Services later Wednesday, followed by Friday’s nonfarm payrolls, to see whether stronger US data restores support to Treasury yields and Dollar and whether the roughly 79.2% December hike probability holds.

Watch also how US cash equity markets respond to the election results, whether the sector rotation away from AI infrastructure persists, and whether the ECB’s December hike and the RBNZ’s December decision stay on track given softer growth and employment data.