Markets on Edge Ahead of US Payrolls
The US dollar slipped alongside two-year Treasury yields after a mixed bag of US economic data, though losses were pared following news that Presidents Xi and Trump had agreed to resume trade negotiations. However, the boost to sentiment was short-lived. Risk appetite took a hit later in the day as a public spat between President Trump and Elon Musk sent Tesla shares tumbling 14%, dragging US equity indices lower.
On the data front, the US trade deficit narrowed by 55% in April, the sharpest contraction on record, driven by a steep fall in imports. This reflects a broader shift, as firms scale back the aggressive front-loading of goods seen earlier in the year in anticipation of tariffs. With import flows still disrupted, trade patterns may remain volatile until tariff regimes stabilise.
At the same time, higher-than-expected jobless claims are pointing to emerging cracks in the labour market. Unit labour costs are rising, while productivity remains soft—suggesting that inflationary pressures persist despite signs of economic slowdown. For the Federal Reserve, this complicates the outlook: balancing weak growth with sticky inflation makes the path for interest rates increasingly uncertain.
Attention now turns to today’s US jobs report, which could prove pivotal for the dollar. Markets expect 126,000 jobs to have been added in May, with unemployment holding steady at 4.2%. However, recent survey data suggests a softer labour market, weighed down by tariff-related uncertainty. A weaker print would likely pressure the dollar further, potentially pushing the DXY back towards three-year lows.
The broader FX market is adjusting to softer US data, but with confidence in the dollar’s role as a global reserve currency continuing to erode, rallies remain capped. Fiscal concerns are also back in focus: the Congressional Budget Office now estimates that President Trump’s tax bill will add $2.4 trillion to the federal deficit over the next decade—another headwind for long-term dollar sentiment.
Euro Rallies on Hawkish ECB Surprise
The euro jumped nearly 1% to $1.1495 after ECB President Christine Lagarde struck a surprisingly hawkish tone in Thursday’s press conference, despite delivering a widely expected 25bp rate cut to 2%. German two-year yields also climbed to a two-week high. Lagarde said the current rate level is appropriate and hinted at potential upward revisions to growth forecasts. Notably, the decision to cut was not unanimous.
She acknowledged that trade uncertainty may weigh on exports, but pointed to government spending on defence and infrastructure as possible growth supports. Following the remarks, money markets pared back expectations for additional cuts this year, no longer fully pricing another ECB move by year-end.
Interestingly, the euro’s rally was not solely due to Lagarde’s comments. A concurrent spike in US jobless claims helped fuel EUR/USD gains, as markets grew more confident that the Fed may cut rates at least twice this year. With the traditional link between EUR/USD and US-German yield spreads weakening, trade tensions and broader economic uncertainty are increasingly driving FX direction.
While some of the euro’s momentum faded later in the session, a softer-than-expected US jobs report today could keep EUR/USD comfortably within the $1.14 range into the weekend.
Sterling Hits 40-Month High
The pound briefly broke above $1.36—the highest level since February 2022—driven by broad dollar weakness and improving UK fundamentals. GBP/USD has traded above this threshold only 14% of the time since Brexit, making the move a notable technical milestone.
Should today’s US payrolls disappoint, the pound could make another push higher. Conversely, a strong US print may see it drift back towards the $1.35 region.
Beyond the dollar story, sterling continues to benefit from resilient UK economic data, positive momentum around trade agreements, and a relatively hawkish Bank of England. These factors have underpinned a strong run for the pound, though momentum may soon wane—technical indicators suggest GBP is nearing overbought territory, and traders are trimming bullish bets in the options market.
Against the euro, however, GBP remains rangebound. The pair is struggling to break back above €1.19, where key moving averages are converging. Yet, with real rate differentials favouring the UK, there remains an argument for GBP/EUR to push closer to €1.20—should policy divergence between the BoE and ECB widen further.
