News & analysis


The dollar extended its losses yesterday as local markets were closed for Independence Day. This morning, with Treasury markets reopening and yields drifting moderately lower, the dollar is once again trading under moderate pressure. Whether that persists or not will depend on how June’s payrolls data prints later today and the outcome of President Biden’s interview on ABC this evening. Turning first to the labour market data. Expectations are for job growth to substantially cool from May’s bumper 272k reading to just 190k, a level that is deemed as having no effect on overall labour market conditions by some Fed members. If realised, this would keep the Fed on track to cut rates in September, as per our base case. The more interesting scenario is if employment cools much more rapidly than markets expect, or an on-expectations print coincides with a significant downgrade to last month’s strength. In this event, the degree in which the labour market cools will be key in determining the dollar’s reaction. A moderate cooling should lift expectations of a cut in September from 72% currently, extending the dollar’s drift lower into the weekend. However, a more sinister negative surprise in either the May or June data could resurrect the risk that the Fed cuts this month if compounded by another weak inflation report. Given ongoing concerns about the speed in which the US economy is slowing, and that the strength of the US labour market has quelled any recession concerns, the rapid increase in the probability of a July cut would likely have risk-off repercussions in markets. In the event of another strong beat in the job’s numbers, the dollar is also likely to catch a bid as the probability of two Fed cuts this year is trimmed.

Not long after the payrolls data is released, President Biden’s interview with ABC will be the main focus for markets. As noted since the first presidential debate last week, the odds of a Trump presidency have explained some of the dollar’s rise and fall. Should Biden fail to squash concerns that he is no longer fit to hold office, we suspect the dollar will remain in favour as Trump takes a compelling advantage in the polls until a new Democratic candidate is announced.


Without the stewardship of US markets, EURUSD was left to trade European developments, which on the whole scanned as positive. Firstly, meeting minutes from June’s ECB meeting showed multiple Governing Council members expressing concerns about cutting rates when inflation and wage developments remained strong. This suggests greater divergence amongst European rate setters than the initial vote split suggests, which just had Robert Holzmann dissenting. Moreover, the latest polls out of France continue to place Marine Le Pen’s National Rally falling short of an outright majority in this weekend’s second round election. As noted in our previews, this would be the most positive outcome for EURUSD and French markets, although the initial risk rally shouldn’t prove durable as worries about fiscal slippage will soon evolve into concerns around governability under a hung parliament. With no market moving data out of the eurozone today, the focus returns to the US, where the strength of June’s payrolls data will determine whether EURUSD can close the week out above the 1.08 handle.

In recent weeks, we’ve had a lot of questions about what it will take for EURUSD to break back above 1.09, levels last seen before France announced a snap election in early June. While a weaker payrolls report will go some way to delivering this, we suspect markets will remain hesitant to re-engage too aggressively in long euro positions heading into this weekend’s second round vote. For this reason, we suspect EURUSD to be one of the more rangebound G10 currencies in the event that the US data sparks a risk rally.


As many, including ourselves, had expected, the UK general election proved a snooze-fest for sterling. The pound was little moved overnight despite receiving news that the UK election result would fall on the more market friendly end of possibilities. That is, Labour would secure a landslide majority, projected at around 170 seats as of writing, but that not corresponding with no effective opposition as the Tories avoided a complete wipe-out with 120 seats projected. While this still means the Conservatives have lost approximately 250 seats and the largest number of ministers in modern history, there are still a sufficiently large rump of Tory MPs left to scrutinise the newly elected government and to offer a credible alternative in five years’ time, which should prevent a sharp leftward move from the incoming Labour government. Despite the historic nature of the result, however, the election outcome largely matched pre-election polls, keeping GBP volatility muted to such a degree that it undershot levels typically seen for top tier economic data releases. We expect this to remain little changed today too, with a blank data calendar heading into the weekend. Next week should be a different story though, with risks that the resumption of BoE commentary could bring with it a dovish shock for markets, tilting risks towards a short-term pullback for the pound.


Despite an alarming slide in yesterday’s June PMIs, the loonie posted a 0.2% gain against the dollar, propelled by a rally in global equities and a broad improvement in risk conditions. That said, with US markets closed for Independence Day, we are disinclined to infer too much from this move lower for USDCAD just yet. In fact, we would be surprised if a reversal was not seen this afternoon. Canadian jobs data looks set to offer another indication that the labour market remains soft, an outcome that should add further weight to the argument that the BoC should cuts rates later this month. Swap markets are pricing just a 40% chance of this outcome, which looks too low to us. We expect this to be above 50% come the weekend if consensus projections for today’s jobs data are realised, seeing unemployment rising 0.1pp to 6.3% with a miserly jobs gain of just 25k. Where there are risks to our call for USDCAD upside later today, they largely stem from the concurrent jobs release in the US. A soft print that sees Fed easing odds accelerate without triggering a dollar haven bid would likely see the loonie outperform on a further pickup in risk conditions, in keeping with recent price action, regardless of the domestic data.



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