Dollar briefly rallies as jobs data surprises and fiscal plan advances

All attention turned yesterday to the June nonfarm payroll figures, widely anticipated as a pivotal driver of near-term dollar direction. The headline numbers exceeded forecasts, revealing payroll growth of 147,000 and a fall in the unemployment rate to 4.1%. The unexpected strength sparked a selloff in Treasury bonds, particularly at the shorter end of the curve, and gave the dollar a temporary boost. Interest rate markets reacted swiftly: a reduction in rates at the July meeting now appears improbable, while the likelihood of a September cut has climbed to 70%.

The data alleviated some worries that trade tensions and broader economic uncertainty were derailing employment growth, shoring up faith in the underlying durability of the US economy. As the session drew to a close, both the S&P 500 and Nasdaq finished the week by reaching record highs.

Beneath the upbeat headline, however, the figures exposed a more uneven landscape. Private-sector payrolls fell short of expectations, coming in at only 74,000. Employment gains were mainly limited to three sectors: government, leisure and hospitality, and private education and healthcare. These areas have collectively accounted for nearly 87% of net hiring over the past thirty months.

In contrast, traditional economic powerhouses such as manufacturing and construction remained largely inactive. Wage increases were modest at 0.2%, while average weekly working hours slipped further, suggesting a degree of fragility that the headline growth concealed.

Despite the positive headline print, currency traders have remained cautious. With the extended holiday period approaching, there is a general reluctance to add to long-dollar positions until there is greater clarity surrounding the outlook for trade tariffs.

On the fiscal side, the House of Representatives approved the OBBB, a sweeping $3.4 trillion measure encompassing significant tax reductions, lower spending on social support schemes, and the dismantling of renewable energy initiatives introduced by the previous government.

President Trump, supported by influential Republican groups, is expected to sign the legislation into law on Friday. Proponents claim the package will stimulate growth and provide $4.5 trillion in tax relief, while critics caution that it risks undermining healthcare provision for millions who depend on Medicaid.

The consequences of this legislation for households and the wider economy are likely to dominate the financial news agenda in the weeks ahead. The last time fiscal matters took centre stage, investors were preoccupied with worries over long-term budget deficits and the now-repealed Section 899. This time around, with markets displaying a clear appetite for risk and those particular headwinds out of the way, attention is shifting to whether the package can deliver a fresh wave of growth and expansion.

Euro’s rally shows its fragile underpinnings

At its heart, the euro’s recent climb remains rather delicate. With little in the way of robust eurozone developments driving the movement, the surge has mostly relied on a persistent wave of pessimism directed at the US dollar.

Yesterday’s unexpectedly strong nonfarm payrolls figures laid bare just how thin the euro’s support truly is. Employment rose, the jobless rate declined (as outlined earlier), and previous months received modest upward revisions. In the aftermath, traders trimmed fresh wagers on further euro appreciation. One-week risk reversals—used to measure directional preferences—drifted close to neutral for EUR/USD and, across several maturities, fell into the lowest decile compared to the past two months’ positioning.

The initial catalyst for the euro’s advance was largely a matter of sentiment. The “Sell-America” impulse and the notion of the euro emerging as a substitute reserve currency dominated headlines once President Trump began his unpredictable trade policies. Steep tariffs, combined with widespread uncertainty about how they would be implemented, unsettled investors and cast doubt over anything linked to US production.

As time wore on and the feared inflationary effects of tariffs did not materialise, more fundamental factors began to play a part. The Federal Reserve shifted towards a more accommodative stance, with early indications from Bowman and Waller followed by Chair Powell’s willingness to consider rate cuts if the data warranted it. This shift narrowed the interest rate gap between the US and the euro area, giving the euro’s gains some additional foundation beyond mere sentiment. The cumulative impact carried EUR/USD up to the $1.18 range.

But the much-anticipated payroll report has now introduced a fresh complication. Just as traders were on the verge of concluding that the Fed was set to pivot decisively towards easing, the stronger data undermined those assumptions, reopened the rate gap, and weakened the main pillar supporting the euro’s advance.

At the same time, trade negotiations are making headway, agreements are beginning to take shape, and the once-firm July 9th deadline appears less rigid than many had thought.

$1.20 target for the EUR/USD remains in target range.

Sterling steadies as political reassurance lifts sentiment

After days of political upheaval, Prime Minister Starmer moved decisively to calm market jitters, delivering a firm endorsement of Rachel Reeves and putting to rest the rumours surrounding her future. Reeves then added her own reassurances, underlining her dedication to maintaining strict fiscal discipline, which provided an extra layer of comfort to investors.

Sterling and the FTSE 100 both advanced, while gilts spurred a recovery in European government bonds, pulling yields lower across maturities. The pound rose by 0.1% against the dollar, faring better than most G-10 currencies, even though stronger-than-forecast US figures weighed on the euro and others.

The more positive mood received another boost when the UK services sector published unexpectedly strong results. The latest data showed the sector expanding at its quickest pace in ten months. S&P Global’s Services PMI climbed to 52.8 in June, up from May’s 50.9, and exceeding the earlier estimate of 51.3, driven largely by a surge in new business.

Although political sentiment improved more rapidly than many had foreseen, cushioning the pound from deeper losses, the broader backdrop remains cautious as the week draws to a close.

Investors continue to harbour doubts about the government’s capacity to uphold its fiscal commitments. At the same time, the shortened US trading week concluded with robust labour market figures, reviving expectations that the Federal Reserve could adopt a more hawkish stance. This has kept the underlying case for dollar strength largely intact.

Consequently, GBP/USD, which has declined by around 0.5% over the course of the week, appears unlikely to test new year-to-date peaks any time soon. For now, it looks set to hover below the resistance level near $1.3775.