Dollar resilience defies soft labour data
The US dollar displayed unexpected fortitude yesterday, as the DXY index edged up 0.04% this morning. This came directly after the ADP figures revealed the first fall in American private-sector employment in more than two years. Yet it is best to temper any optimism; the dollar still languishes just above a three-year trough, having slipped nearly 2% since the beginning of June.
Payroll numbers declined by 33,000 last month, following May’s revised 29,000 increase – a stark contrast to Bloomberg’s forecast of a 98,000 gain. Not a single forecaster had predicted a contraction. It appears businesses have grown more cautious, curbing expenses and scaling back hiring in reaction to lingering uncertainty stemming from earlier US trade policy.
ADP is still widely regarded as the least reliable of employment measures – prone to swings, frequently misaligned with the official nonfarm payrolls, and easily eclipsed by more robust signals such as Tuesday’s JOLTS job openings data. Additionally, remarks by Fed Chair Powell in Sintra reiterated confidence in employment prospects, which helped to steady sentiment. A particularly poor session for sterling – the dollar index’s third-largest component – further propped up the greenback.
Separately, President Trump secured a trade accord with Vietnam, postponing harsher tariffs that had been scheduled for next week. Although a 20% duty on Vietnamese goods will still take effect (rising to 40% if items are re-exported), Hanoi agreed to abolish all tariffs on US imports. While rates remain elevated compared to pre-Trump levels, markets have treated the reduction from an earlier 46% threat as a favourable development.
Investors now turn their focus to today’s nonfarm payroll release, anticipated to come in at a softer 106,000, the lowest reading in four months. Should the data disappoint, it could cement expectations of a more dovish Federal Reserve stance into the third quarter, putting renewed pressure on the dollar.
Sterling rattled by political upheaval
Sterling suffered a broad sell-off yesterday, weighed down by fresh political turmoil that erupted earlier in the week. UK assets came under strain as doubts resurfaced about the government’s fiscal stability. During the session, sterling fell more than 1% against a range of currencies, including the dollar, Canadian dollar, and Swiss franc. Yields on longer-dated gilts surged, with the 30-year rate climbing 21 basis points to 5.44%, before retreating modestly later on as political tensions abated.
The slide gathered momentum on Tuesday evening, when Prime Minister Keir Starmer scrapped his flagship welfare overhaul in the face of a backbench rebellion – a decision that not only dented his authority but also created a fresh £5 billion hole in the budget. When combined with last month’s £1.25 billion reversal on winter fuel payments, the already narrow fiscal buffer of £9.9 billion has been eroded further, raising alarm among investors.
Concerns intensified when Starmer declined to reaffirm Chancellor Rachel Reeves’ position in the Commons, fuelling speculation about her future and, more broadly, about the government’s capacity to uphold its spending pledges. Market anxiety deepened on suggestions that a potential successor might jettison the current fiscal restraint, sparking expectations of rising borrowing.
Calmer waters returned midweek after the Prime Minister appeared on the BBC, declaring that Reeves would remain Chancellor ‘for many years,’ an attempt to draw a line under the uncertainty that had rattled bonds and the pound. Sterling stabilised somewhat during Asian hours, although sentiment remains cautious.
In the absence of major UK economic releases, politics is likely to dominate sterling’s direction into the weekend. Unless US jobs data later today is markedly weaker, reviving expectations of rate cuts across the Atlantic, any fresh upward movement in GBP/USD may be limited.
Euro advance stalls on growth concerns
The euro struggled to sustain its recent ascent, briefly approaching the $1.18 threshold but falling short of establishing a stronger foothold above it. Even with Tuesday’s subdued JOLTS data offering some encouragement, traders remained firmly focused on the upcoming US employment figures. The ADP release failed to shift the narrative, likely overshadowed by more convincing signs of labour market strength earlier in the week.
Although momentum has cooled in recent sessions, the euro remains nearly 14% stronger against the dollar this year, sparking unease that such rapid appreciation could hurt the euro area’s already fragile export competitiveness. As the currency strengthens, European products become pricier abroad, placing manufacturers at a disadvantage in an increasingly contested global market.
The challenges extend beyond trade alone. A more expensive euro also generates translation risks, reducing the value of overseas earnings when converted back into euros, which in turn weighs on corporate profits and equity performance. These themes featured prominently during discussions at the ECB’s Sintra gathering, where policymakers considered the possibility of further rate cuts to counteract disinflationary pressures linked to currency strength.
Nonetheless, ECB Vice President de Guindos emphasised that the central bank remains ‘in a good place’ with current rates, suggesting that additional moves below the 2% level are not immediately warranted. Instead, he called for greater clarity around fiscal and trade policies to help underpin growth. For now, expect the EUR/USD rally to stay subdued, likely remaining under the $1.18 mark until the US payroll data provides fresh direction.
