Jobs data tightens the case for Fed easing
Fresh US data has sharpened the focus on the labour market, which is now giving the clearest signal of a slowing economy weighed down by protectionism and uncertainty.

Job openings fell to 7.18 million in July, down from a revised 7.36 million in June and below consensus of 7.38 million. Layoffs also jumped, rising to 1.81 million from 1.60 million previously, with earlier figures revised higher as well. Together, these revisions confirm a softening trend.

Markets reacted quickly. Expectations for this month’s Fed meeting shifted from 20 basis points of easing already priced to 24, leaving only a marginal gap to a full quarter-point cut. The message is clear: confidence in a September move has rarely been stronger.

The steady fall in the quits rate adds weight to the case. With fewer workers leaving jobs voluntarily, wage pressures are easing. Less competition for talent means firms have less reason to raise pay, and that dynamic will be central to the Fed’s deliberations later this month.

The dollar weakened in response. The DXY fell by as much as 0.4% on Tuesday before bouncing off support near 98. Sensitivity to data remains high, with investors demanding firm evidence of the economic toll from tariffs before extending the dollar’s decline.

Euro waiting for a catalyst
The euro recovered about half of its earlier losses against the dollar but remains stuck within a narrow 1.5% band over the past month. Attempts to break above the 21- and 50-day moving averages have so far failed. Tuesday’s lift was driven by softer US figures, yet investors are becoming more selective in chasing dollar weakness.

European political tensions have not yet spilled over into a broader crisis of confidence in the single currency, leaving bond markets as the main outlet for fiscal concerns. With rate differentials converging towards the spot level, a new driver is needed to break the range. Friday’s US payrolls could provide that spark. The recent rise in EUR/USD overnight volatility, which now captures that release, is a warning sign.

Even so, euro bulls retain a constructive case. Growth expectations have improved, supported by easing financial conditions and lower energy prices. France and Spain have led the rebound, while German manufacturing edges closer to expansion. The Ifo expectations index has reached its highest since 2021, and fiscal stimulus is expected to come through later this year and into 2026.

French political risk may still limit gains, but the drag from OAT underperformance is showing signs of fading. The euro nevertheless remains exposed to sudden shocks, as December’s government collapse in Paris illustrated.

Volatility is likely to stay elevated this month. One-week implied vol, now covering payrolls, inflation, and the ECB meeting, has reached a two-month high. The spread between implied and realised volatility is at its widest since January, with options screening as expensive as traders position for potentially significant resets into year-end.

Sterling’s footing remains weak
Sterling regained about half of Tuesday’s losses as gilts steadied after their sharp slide. Weak US jobs data provided a reason for the rebound, but the underlying picture remains fragile.

The sell-off in bonds is not unique to Britain. Rising yields are a global theme, but the UK has been singled out due to persistent inflation and stronger-than-expected economic releases, which have forced markets to price a more hawkish Bank of England. This “higher for longer” stance has added pressure, contributing to the rout in gilts. Elevated borrowing costs also heighten the strain on Prime Minister Starmer’s government as it seeks to meet strict fiscal targets.

A dovish repricing from the BoE, which may not be far off, could provide some relief. Yet that does not necessarily mean the pound will benefit. Markets currently see only a 40% chance of a cut by year-end. Such limited pricing leaves room for a sharper bearish adjustment if expectations change.

Our outlook remains negative on sterling. GBP/EUR looks set to test support at 1.1480. GBP/USD is more dependent on US dynamics, meaning weaker American data could allow some short-term upside. A move above 1.35 would be the next test for resistance this week.