Jobs, jolts, and July: The Fed’s cut gets closer
As more US macro data rolls in, it’s the labour market – more than any other sphere of the economy – that’s starting to offer the most cohesive picture of a slow-cooking US economy, weighed down by a forceful protectionist agenda and clouded by deep uncertainty.
Job openings fell to 7.181 million in July, down from a downwardly revised 7.357 million in June (consensus: 7.380 million). The report also showed a notable uptick in layoffs, rising to 1.808 million from 1.604 million previously, with revisions lifting the prior figure to 1.796 million – underscoring a clear shift in trend.
Markets responded swiftly, filling in that residual gap to the bream: from 20 basis points of a cut previously priced in, the move to 24 bps leaves just a 1 bp discrepancy – signaling that expectations for a Fed rate cut this month have never been higher.
The continued decline in the quits rate, also, points to easing wage pressures. Fewer voluntary departures – driven by economic uncertainty – mean less competition for talent, reducing the incentive for employers to raise wages. These dynamics will be central to the Fed’s deliberations at its September meeting, making a stronger case for a cut.
As expected, the dollar weakened, with the dollar index – DXY – falling as much as 0.4% during yesterday’s session before bouncing off support at the 98 level. As we’ve stressed repeatedly, the greenback’s sensitivity to US macro data is at a peak, with investors seeking hard evidence of the economic toll from tariffs to justify further downside in the currency.
Stuck in the range: euro needs a new driver
The euro recovered roughly half of Tuesday’s losses against the dollar, but remains stuck in a tight 1.5% range over the past month, struggling to break above its 21- and 50-day moving averages. The bounce was largely driven by softer U.S. data, but the market’s appetite for dollar weakness is becoming more selective.
Political instability in Europe hasn’t yet spilled into broader euro existential risk, meaning bond markets remain the preferred outlet for fiscal concerns. Still, with rate differentials converging towards EUR/USD spot, a fresh catalyst is needed to break out of the current range. If Friday’s U.S. payrolls confirm signs of labour market cooling, that could be the trigger. The jump in EUR/USD overnight volatility, which now captures that event – is a warning signal.
Euro bulls remain well-positioned as growth expectations and rate spreads reassert themselves. Despite tariff uncertainty, euro area businesses have held up through the summer, supported by lower energy costs and easing financial conditions. France and Spain led the rebound, while Germany’s manufacturing sector is edging closer to expansion. The Ifo expectations index is now at its highest since 2021, and fiscal stimulus is expected to kick in later this year and into 2026.
French political risk may still cap near-term upside, but the drag from French bond underperformance appears to be fading. That said, the euro isn’t immune to sudden shocks – December’s Barnier government collapse is a reminder.
Meanwhile, volatility is is likely to remain elevated this month. One-week implied vol, which now covers payrolls, inflation, and the ECB meeting, has hit a 2-month high. The implied-realized spread has widened to its highest since January, with options screening as expensive, as these events could reset FX positioning into year-end.
Sterling on shaky ground
GBP/USD recovered roughly half of Tuesday’s losses as gilts stabilized following the sharp sell-off. Weak US labour market data, however, justified much of the rebound.
The sell-off in bonds is not a UK-specific phenomenon; it reflects broader concerns across major global economies. The UK, however, found itself in the spotlight due to persistently high inflation and stronger-than-expected macroeconomic data, which prompted a hawkish repricing of BoE expectations. In this context, the “higher for longer” rate strategy proved problematic, intensifying the sell-off. Elevated rates place additional pressure on Starmer’s government to meet increasingly urgent self-imposed constraints on public finances.
We believe a dovish repricing – likely not far off – could help ease some of these concerns. That said, this does not imply sterling will emerge as a winner. Markets currently price in only a 40% chance of a rate cut by year-end. This underpricing could lead to more pronounced bearish effects on sterling as repricing unfolds.
We maintain a bearish outlook on sterling. GBP/EUR is eyeing €1.1480 as the next support level to be tested. GBP/USD, meanwhile, remains primarily a USD-driven story. If US data continues to weaken, it could help temper further downside pressure on sterling, providing some short-term upside even. For this week, that would mean breaking north of resistance at $1.35.
Safe haven Gold is in overbought territory
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: September 1-5
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
