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.

Weak US data lifts Pound as economic concerns deepen

Fresh figures from the United States suggest the economy is showing signs of stagnation paired with persistent inflation—a combination that economists refer to as stagflation. In response, the Pound strengthened against the Dollar, with the GBP/USD rate climbing to an interbank high of 1.3610 on Thursday.

This came after a weaker-than-expected update from the Institute for Supply Management (ISM), whose services PMI dropped to 49.9 in May, down from the previous reading by 1.7 points. The figure came in well below forecasts of 52.0 and indicates a slowdown, as any reading under 50 suggests contraction in the sector.

The slowdown appears to be driven largely by a marked decline in new business and flatlining activity—likely linked to prolonged trade-related challenges. At the same time, the report's measure of prices paid continued to rise, suggesting inflationary pressures remain firmly in place. This presents a dilemma for the Federal Reserve, as rising prices make it more difficult to justify interest rate cuts, even as the broader economy loses momentum.

Compounding concerns was a separate employment update released on Thursday. The ADP private payrolls report showed just 37,000 jobs were added in May—the weakest result in more than two years and well below the 115,000 anticipated by analysts.

All eyes now turn to Friday's official labour market report. Should that data also disappoint, the Dollar may weaken further, potentially pushing GBP/USD to fresh highs for the year.

Euro strengthens as ECB signals rate cuts may be nearing an end

The euro gained ground following fresh comments from the European Central Bank, which hinted that its cycle of interest rate reductions could soon draw to a close.

President Christine Lagarde announced on Thursday that the ECB had cut its key policy rate by 25 basis points to 2.0%. However, she also suggested this could be one of the final moves in the current easing phase, indicating that borrowing costs may now be appropriately aligned with the economic outlook.

“We are in a good place,” said Lagarde, implying little urgency for further action. Her remarks have cast doubt on expectations for additional reductions, with some economists now questioning whether a further cut to 1.75% is still likely. 

The euro showed resilience in the face of the actual rate cut, as markets appeared more focused on the ECB's downgraded forecasts for inflation and growth. Yet it was Lagarde’s press conference that appeared to shift sentiment more decisively. Investors responded by adjusting their expectations, with money markets now anticipating no more than one further cut before the end of the year.

As a result, the euro-to-dollar exchange rate rose to 1.1476, edging closer to the 1.15 mark. The euro also moved higher against the pound, recording a daily increase of 0.13% and reaching 0.8436, while the pound-to-euro rate slipped to 1.1852.

In a noteworthy aside, one member of the ECB’s Governing Council expressed a differing view—though details remain limited for now.

GBP/USD buoyed by strong UK economic data

The British pound has shown notable strength this year, supported by a steady stream of better-than-expected UK economic indicators. This momentum has pushed the GBP/USD pair up by more than 8% year-to-date, closely mirroring the gap between economic surprises in the UK and the US. The relationship between these two surprise indices has reached near-decade highs over the past six months, driven largely by solid UK performance rather than weakness in the US.

The broader trend of de-dollarisation is influenced by the US’s mounting debt, inconsistent policy environment, and softer economic growth, which has weighed on the dollar. Nevertheless, the strong link to UK data suggests the pound could maintain its upward trajectory as long as UK fundamentals stay robust. However, should UK data falter or the US economy rebound sharply, the pound’s advance may slow, with resistance near $1.36 likely to be significant.

Looking at May’s UK Purchasing Managers’ Index figures, the composite PMI was revised upward to 50.3, improving from a preliminary 50.0 and April’s 48.5. This indicates a modest return to growth, albeit one of the weakest since October 2023. The improvement was mainly driven by increased activity in the services sector, which helped offset ongoing declines in manufacturing.

The services PMI climbed to 50.9, suggesting a tentative recovery amid reduced concerns over US tariffs. However, demand remains soft, with new orders falling for the fourth time in five months. Employment in services has declined for eight consecutive months, though the most recent decrease was the smallest since late 2024. Price pressures remain, but business confidence has improved, buoyed by planned investments and a more optimistic economic outlook.

US economic indicators signal slowing growth, pressuring the dollar

Recent data from the United States points to a cooling economy, contributing to a weaker dollar as markets grow cautious about the risk of a downturn later this year. The ADP report for May revealed private sector job gains of only 37,000, the smallest since March 2023, suggesting labour market momentum is softening.

The ISM services index also disappointed, falling to 49.9 against an expected 52.0, with new orders dropping sharply to 46.4 from 52.3 in April. Both business activity and new orders have now hit levels not seen since the early months of the pandemic in 2020. Meanwhile, inflationary pressures remain elevated, as the prices paid index climbed to 68.7, matching levels last observed during the post-pandemic supply chain bottlenecks.

These signals have influenced US Treasury yields, with the 10-year yield dropping below 4.4% and the 30-year yield falling beneath 5%. Volatility in equity markets, as measured by the VIX, has eased below its decade average of 18.5, reflecting a calmer environment. Overall, the US dollar is adjusting to the prospect of slower growth, contributing to softer pricing in currency markets.

On trade, discussions are ongoing regarding the upcoming expiration of a 90-day tariff truce. While a lower court initially blocked some tariffs, this decision was overturned on appeal, keeping them in place. The evolving trade environment remains a source of uncertainty for markets.

Attention now turns to the Non-Farm Payrolls report expected tomorrow, with forecasts for 126,000 jobs added in May and unemployment steady at 4.2%. A result below expectations could weigh heavily on the dollar and potentially push the DXY index to revisit its 2025 lows near 97.9.

Euro maintains ground above $1.14 amid cautious sentiment

The euro has managed to hold above the $1.14 mark, supported in part by weaker US economic data. This strength has helped EUR/USD stay above its 21-day moving average, though market participants remain wary of stronger US employment figures expected later this week, which could exert downward pressure.

Despite the softer US data, ongoing trade negotiations between the US, China, and the EU continue to limit the euro’s upside potential. Any US dollar recovery tends to undermine confidence in the euro’s prospects as a future global reserve currency, a notion that had gained some traction recently.

Political and economic tensions are mounting as key deadlines approach. EU officials remain cautious amid trade negotiations and geopolitical uncertainties such as the war in Ukraine. The forthcoming G7 summit in Canada and trade talks scheduled in Brussels are highly anticipated for the guidance they might offer on avoiding severe tariffs on European goods.

Volatility in the EUR/USD pair has remained muted compared to previous European Central Bank meeting days. The ECB is widely expected to reduce its deposit rate to 2.00% in its upcoming decision, with markets pricing in almost full certainty of the cut. This expectation is underpinned by recent inflation data showing headline inflation falling below the ECB’s 2% target to 1.92%, and core inflation easing to 2.3%, signalling a weakening economic outlook for the Eurozone.

Dollar edges higher ahead of key data releases

The US dollar staged a modest rebound on Tuesday, as investors digested a mixed batch of economic data, offering fresh clues on the Federal Reserve’s (Fed) monetary policy trajectory. While the bounce lifted the greenback from a six-week low, persistent concerns over economic growth and ongoing trade tensions continued to cap gains—particularly as President Trump announced a doubling of tariffs on steel and aluminium, from 25% to 50%.

On the labour front, job openings in April—as measured by the JOLTs survey—unexpectedly rose to 7.39 million, beating forecasts and March’s revised figure of 7.2 million, reaffirming resilience in the jobs market. However, factory orders posted a steep decline of 3.7%, pointing to weakness in the manufacturing sector and raising fresh questions about the broader economic outlook. All eyes now turn to today’s ADP employment report and ISM services PMI, which will set the tone ahead of Friday’s pivotal non-farm payrolls release—critical in shaping expectations for Fed policy and, in turn, the dollar’s direction.

In the near term, dollar movements remain closely tied to shifting Fed expectations. Despite mounting calls for rate cuts, policymakers have so far indicated a preference to hold steady. Trade tensions further muddy the waters, with the OECD cutting its US growth forecast to 1.6% for 2025 and 1.5% for 2026, citing heightened global uncertainty.

Beyond these short-term drivers, there is a growing focus on the longer-term challenges facing the dollar. De-dollarisation concerns are mounting, not least due to Trump’s proposed “revenge tax”—Section 899—which introduces yet another deterrent for foreign investors, undermining confidence in US assets, including Treasuries.

Volatile trade policies and deteriorating fiscal conditions have already raised questions over the sustainability of dollar-denominated holdings, prompting international institutions to reassess their exposure. Should foreign investors view US assets as increasingly risky, capital flows may continue to shift away from the dollar, exacerbating its longer-term structural headwinds.

Euro pressured by soft inflation ahead of ECB meeting

The euro came under pressure on Tuesday, weighed down by weaker-than-expected inflation figures and stronger US data, both of which highlighted near-term headwinds for the single currency. A downgraded global growth outlook from the OECD, coupled with growing political uncertainty in the Netherlands, also contributed to cautious sentiment. Meanwhile, trade tensions remained front and centre, with the US pushing for final offers in negotiations by Wednesday—mere days after floating fresh tariff threats.

Ahead of Thursday’s European Central Bank (ECB) meeting, inflation data from the euro area lent further support to the case for an imminent rate cut. Services inflation dropped to 3.2% from 4%, while core inflation fell sharply to 2.3% and headline inflation eased to 1.9% in May—all suggesting that price pressures are now likely to undershoot the ECB’s target. This has cemented market expectations for a 25 basis point cut in the deposit rate, bringing it down to 2%. While this weighed on the euro in the short term, the impact could prove temporary.

So far, trade-related uncertainties have had only a limited effect on Eurozone growth. Declining global commodity prices and recent euro strength against the dollar have helped to temper inflation. With price pressures easing, the ECB’s focus is increasingly shifting toward bolstering growth—potentially creating a more supportive environment for the euro in the medium term.

Furthermore, in an environment of rising FX volatility, the euro remains well-positioned as a viable alternative to the dollar. Over recent months, it has benefited from this status, and that trend may continue. In the short term, holding above $1.1285 will be crucial to enable a possible retest of the $1.16 level this summer. But many investors are already looking past near-term noise, positioning for a longer-term appreciation in the euro, with $1.20 seen as a credible target by year-end.

Pound slips following dovish rhetoric from the BoE

Sterling slipped against major currencies on Tuesday, erasing early-week gains. Even against the US dollar—recently one of the weaker performers among the majors—the pound faltered, with GBP/USD briefly dipping below the $1.35 threshold before staging a modest recovery.

With few fresh developments on the trade front—a factor that has recently weighed on the dollar—strong US labour data and an equity market rally supported renewed demand for the greenback, leaving sterling on the back foot.

The pound’s decline was further exacerbated by dovish signals from the Bank of England. In testimony before the Treasury Committee, Governor Andrew Bailey, Deputy Governor Sarah Breeden, and policymakers Catherine Mann and Swati Dhingra offered cautious assessments of the outlook. Their comments reinforced expectations of further rate cuts, though with an increasing degree of uncertainty driven by global market volatility—much of it stemming from US trade policy unpredictability. Markets are now pricing in a 62% chance of a second rate cut by the end of the year.

Bearish sentiment was compounded by the resurfacing of Mann’s previous remarks on quantitative tightening. She warned that continued bond sales could hamper growth by keeping long-dated yields elevated, potentially conflicting with any attempt to loosen monetary policy through rate cuts. The market interpreted the messaging as firmly dovish—yields fell, and the pound followed suit.