EUR/USD holds firm as dollar slips and yen jumps

Market overview

FX markets are reaching a potential turning point, with the dollar losing momentum just as volatility returns elsewhere. Weak US labour data has raised fresh questions over the Fed outlook, but higher energy prices and stubborn inflation are stopping markets from turning decisively bearish on the greenback. At the same time, a sudden surge in the yen has reignited intervention speculation, sterling is coming under pressure from growing UK fiscal concerns, and the euro is being pulled between a hawkish ECB and rising energy costs. With US payrolls approaching, the next move across major currencies could be significant.

USD: Softer jobs data checks the dollar

The US dollar slipped back to 99.59 as a run of weaker labour indicators weighed on sentiment. ADP payrolls rose by just 38,000 in August, the weakest monthly increase since January, while JOLTS data showed both job openings and quits falling. Employment within the ISM manufacturing survey also softened, while construction spending declined by 0.5% in July.

The inflation picture remains less comfortable. Factory orders rebounded by 0.9%, while the ISM Prices Paid index stayed elevated at 71.1. The Federal Reserve’s Beige Book also pointed to modest activity and only limited hiring, reinforcing the sense that growth is cooling without inflation pressures disappearing.

Geopolitical risks continue to offer the dollar some support. Renewed US and Iranian military action has lifted oil prices sharply, with Brent trading above $95 a barrel. Higher energy costs strengthen the inflation argument and may limit how far US yields and the dollar can fall.

The DXY remains confined between roughly 99.40 and 99.80, with the 100 level continuing to cap the upside. Friday’s payrolls report now looks pivotal. Another weak jobs print would increase pressure on the dollar, while stronger employment data could quickly revive expectations for tighter Fed policy.

Our bias remains moderately constructive on the dollar, supported by front-end rates and higher energy prices, although renewed pressure on long-dated Treasury yields remains an important risk.

EUR: Energy pressures limit the upside

The euro was broadly subdued, although moves across individual crosses were more pronounced. EUR/NZD gained around 0.7% after the Reserve Bank of New Zealand offered less hawkish guidance, while EUR/JPY fell close to 1% as intervention speculation strengthened demand for the yen.

The euro also softened against commodity-linked currencies including the NOK, CAD and AUD as higher oil and gas prices improved the relative outlook for energy exporters. European gas prices have climbed to their highest level in three years, while oil futures are again approaching $100 a barrel.

For the eurozone, higher energy costs remain an important constraint. They may reinforce a more hawkish ECB stance through inflation, but they also increase pressure on household and business costs. For now, the rates impact appears more significant than the direct hit to the eurozone’s trade position.

EUR/USD continues to consolidate around 1.16, with 1.1570 providing an important near-term support level. Markets remain reluctant to fully price a Federal Reserve hike on 16 September, which has helped limit downside pressure. Friday’s US payrolls and next week’s inflation data should provide the next meaningful direction.

GBP: Fiscal concerns return to centre stage

Sterling remains vulnerable as investors turn their attention back to the UK’s fiscal position. Prime Minister Andy Burnham’s first Commons Questions session did little to unsettle gilt markets, although the broader global bond sell-off makes the domestic signal difficult to isolate.

Thirty-year gilt yields are now at their highest level in more than two decades, increasing pressure on already tight government finances. Bloomberg Economics estimates that the rise in borrowing costs could reduce the government’s £23.6bn fiscal buffer by around £12bn.

Burnham reiterated the government’s commitment to fiscal responsibility but offered little detail on the balance between borrowing, taxation and spending. That leaves markets increasingly focused on the 28 October Budget and how the government intends to remain within its fiscal rules.

The clearest market reaction has come through GBP/EUR, which has broken below the 1.1650 to 1.1700 range that had held since late July. A sustained move lower would bring 1.1600 into focus.

For sterling, domestic fiscal uncertainty is likely to remain a headwind as the Budget approaches, leaving the balance of risks tilted to the downside.

JPY: Intervention fears shake carry trades

The yen surged sharply on Wednesday, with USD/JPY falling close to 1% within minutes before extending the move overnight. The speed of the move immediately revived speculation that Japanese authorities had stepped back into the market.

Traders remain divided over whether intervention actually took place, particularly as electronic trading systems showed little evidence of the disruption normally associated with large official flows. Even so, the price action served as a warning to investors running large short-yen positions, particularly in USD/JPY above 160 and EUR/JPY above 186.

Bank of Japan board member Hajime Takata added to the yen-supportive tone by signalling that larger or consecutive rate increases could be considered. Previous episodes suggest Japanese authorities prefer intervention to coincide with a more supportive monetary policy backdrop rather than rely on FX operations alone.

Despite the latest move, a likely Federal Reserve rate hike in September may continue to keep USD/JPY supported. A more lasting reversal would probably require a materially more hawkish Bank of Japan, alongside stronger incentives for Japanese investors to keep capital at home.

Looking ahead

• US nonfarm payrolls: Friday’s jobs report is the key near-term event for the dollar and Fed expectations.

• US inflation: Next week’s CPI figures will test whether softer activity is being matched by easing price pressure.

• USD/JPY: Markets will remain alert to signs of further Japanese intervention and any additional hawkish signals from the Bank of Japan.

• EUR/USD: The 1.1570 area remains an important support level, with 1.16 continuing to act as the key near-term pivot.

• GBP/EUR: A sustained break below 1.1650 keeps 1.1600 in view as UK fiscal concerns build ahead of the Budget.

• Energy markets: Higher oil and gas prices remain an important driver for inflation expectations, relative rate pricing and commodity-linked currencies.