Dollar resilience defies soft labour data

The US dollar displayed unexpected fortitude yesterday, as the DXY index edged up 0.04% this morning. This came directly after the ADP figures revealed the first fall in American private-sector employment in more than two years. Yet it is best to temper any optimism; the dollar still languishes just above a three-year trough, having slipped nearly 2% since the beginning of June.

Payroll numbers declined by 33,000 last month, following May’s revised 29,000 increase – a stark contrast to Bloomberg’s forecast of a 98,000 gain. Not a single forecaster had predicted a contraction. It appears businesses have grown more cautious, curbing expenses and scaling back hiring in reaction to lingering uncertainty stemming from earlier US trade policy.

ADP is still widely regarded as the least reliable of employment measures – prone to swings, frequently misaligned with the official nonfarm payrolls, and easily eclipsed by more robust signals such as Tuesday’s JOLTS job openings data. Additionally, remarks by Fed Chair Powell in Sintra reiterated confidence in employment prospects, which helped to steady sentiment. A particularly poor session for sterling – the dollar index’s third-largest component – further propped up the greenback.

Separately, President Trump secured a trade accord with Vietnam, postponing harsher tariffs that had been scheduled for next week. Although a 20% duty on Vietnamese goods will still take effect (rising to 40% if items are re-exported), Hanoi agreed to abolish all tariffs on US imports. While rates remain elevated compared to pre-Trump levels, markets have treated the reduction from an earlier 46% threat as a favourable development.

Investors now turn their focus to today’s nonfarm payroll release, anticipated to come in at a softer 106,000, the lowest reading in four months. Should the data disappoint, it could cement expectations of a more dovish Federal Reserve stance into the third quarter, putting renewed pressure on the dollar.

Sterling rattled by political upheaval

Sterling suffered a broad sell-off yesterday, weighed down by fresh political turmoil that erupted earlier in the week. UK assets came under strain as doubts resurfaced about the government’s fiscal stability. During the session, sterling fell more than 1% against a range of currencies, including the dollar, Canadian dollar, and Swiss franc. Yields on longer-dated gilts surged, with the 30-year rate climbing 21 basis points to 5.44%, before retreating modestly later on as political tensions abated.

The slide gathered momentum on Tuesday evening, when Prime Minister Keir Starmer scrapped his flagship welfare overhaul in the face of a backbench rebellion – a decision that not only dented his authority but also created a fresh £5 billion hole in the budget. When combined with last month’s £1.25 billion reversal on winter fuel payments, the already narrow fiscal buffer of £9.9 billion has been eroded further, raising alarm among investors.

Concerns intensified when Starmer declined to reaffirm Chancellor Rachel Reeves’ position in the Commons, fuelling speculation about her future and, more broadly, about the government’s capacity to uphold its spending pledges. Market anxiety deepened on suggestions that a potential successor might jettison the current fiscal restraint, sparking expectations of rising borrowing.

Calmer waters returned midweek after the Prime Minister appeared on the BBC, declaring that Reeves would remain Chancellor ‘for many years,’ an attempt to draw a line under the uncertainty that had rattled bonds and the pound. Sterling stabilised somewhat during Asian hours, although sentiment remains cautious.

In the absence of major UK economic releases, politics is likely to dominate sterling’s direction into the weekend. Unless US jobs data later today is markedly weaker, reviving expectations of rate cuts across the Atlantic, any fresh upward movement in GBP/USD may be limited.

Euro advance stalls on growth concerns

The euro struggled to sustain its recent ascent, briefly approaching the $1.18 threshold but falling short of establishing a stronger foothold above it. Even with Tuesday’s subdued JOLTS data offering some encouragement, traders remained firmly focused on the upcoming US employment figures. The ADP release failed to shift the narrative, likely overshadowed by more convincing signs of labour market strength earlier in the week.

Although momentum has cooled in recent sessions, the euro remains nearly 14% stronger against the dollar this year, sparking unease that such rapid appreciation could hurt the euro area’s already fragile export competitiveness. As the currency strengthens, European products become pricier abroad, placing manufacturers at a disadvantage in an increasingly contested global market.

The challenges extend beyond trade alone. A more expensive euro also generates translation risks, reducing the value of overseas earnings when converted back into euros, which in turn weighs on corporate profits and equity performance. These themes featured prominently during discussions at the ECB’s Sintra gathering, where policymakers considered the possibility of further rate cuts to counteract disinflationary pressures linked to currency strength.

Nonetheless, ECB Vice President de Guindos emphasised that the central bank remains ‘in a good place’ with current rates, suggesting that additional moves below the 2% level are not immediately warranted. Instead, he called for greater clarity around fiscal and trade policies to help underpin growth. For now, expect the EUR/USD rally to stay subdued, likely remaining under the $1.18 mark until the US payroll data provides fresh direction.

Pound pressured by dovish signals

Sterling had recently flirted with the $1.38 level, reaching a year-to-date peak of $1.3789 on Monday, before retreating on the back of stronger-than-expected US macroeconomic data. The GBP/USD pair reversed course later in the session, falling over 0.3% from its high and opening Tuesday’s trading within the $1.3730–$1.3750 range.

While the initial move reflected renewed dollar strength, the more decisive factor came from the Bank of England. Governor Andrew Bailey struck an overtly dovish tone—first in an interview with CNBC, then during remarks at the ECB’s forum in Sintra—declaring that “the direction of interest rates is downwards.” His comments stood in sharp contrast to the relatively cautious stances adopted by the ECB and Federal Reserve.

Bailey highlighted a weakening UK labour market and growing global uncertainty as key headwinds for investment and economic momentum. His focus on downside risks—rather than inflationary persistence—sent a clear message to markets: rate cuts are now firmly on the table. As a result, market pricing for an August cut jumped to 84%, up from 78% before his comments.

Surprises among global currencies

Among G10 currencies, the Swedish krona has emerged as the standout performer in the first half of the year, appreciating nearly 17% against the US dollar. This rally came despite the Riksbank cutting its policy rate by another 25 basis points in June, bringing it down to 2%. The move underscores that interest rate differentials aren’t the dominant factor—particularly with US rates still elevated.

Instead, the krona’s strength reflects several interwoven dynamics: a broadly weaker dollar, the krona’s tight correlation with the euro, and a catch-up rally from previously undervalued levels, as noted by both the IMF and Riksbank. Renewed investor confidence in Sweden’s pro-industrial policy direction and speculative inflows have added further momentum, indicating a deeper structural realignment rather than short-term yield chasing.

The euro has also benefited, rising 14% year-to-date and inching closer to the $1.20 level. The Swiss franc continues to draw strength from its safe-haven status.

Euro rally falters on robust US data

Earlier this week, the euro's rally lost steam in late London trading, with EUR/USD slipping back into the $1.17 range. The retreat followed stronger-than-expected US economic releases—particularly the JOLTS jobs report, which showed vacancies climbing to 7.77 million (vs. 7.30 million forecast), along with a drop in layoffs and a rise in voluntary quits. The ISM Manufacturing Index also surprised to the upside, increasing to 49 from 48.8.

Adding further weight to the dollar, Federal Reserve Chair Jerome Powell, speaking at the ECB Forum in Sintra, maintained a data-driven approach and did not signal any near-term rate cuts—despite acknowledging that tariff-driven price pressures could soon begin to show in inflation prints. Markets had perhaps been hoping for a more dovish pivot; none materialised.

In the eurozone, ECB President Christine Lagarde echoed a similarly cautious line, reiterating a meeting-by-meeting stance with no fresh policy direction. Headline inflation in the bloc ticked up slightly to 2.0% (from 1.9%), while core inflation held steady at 2.3%, amid a mixed set of national inflation prints.

While geopolitical tensions have eased, tariffs remain a lingering risk to the inflation outlook. That said, both EU and US officials remain confident a negotiated resolution is within reach, and a worst-case scenario—such as 50% tariffs on EU imports—looks increasingly unlikely.

Encouragingly, consumer expectations are softening. According to the ECB’s Consumer Expectations Survey, one-year inflation expectations fell to 2.8% (vs. 3.1% forecast), and the three-year outlook eased to 2.4% (vs. 2.5%).

Unless incoming US labour data (ADP later today, non-farm payrolls Thursday) shift sentiment, EUR/USD is likely to remain below the $1.18 threshold and could drift towards the $1.16 handle.

Mixed signals from US manufacturing

As Q3 gets underway, the latest ISM Manufacturing Index offers a mixed picture of US industrial activity. The index nudged up to 49 in June, slightly above May’s 48.5. While still signalling contraction, the slower pace of decline suggests tentative stabilisation. Notably, the production sub-index rebounded to 50.3 from 45.4, and inventories improved. However, new orders, employment, and backlogs all showed deeper contractions, underscoring lingering demand-side fragility.

Inflationary pressures remain pronounced. The prices paid component rose to 69.7—its highest level in nearly three years—driven largely by rising input costs and tariff effects. Manufacturers have responded cautiously, trimming staff and scaling back forward orders until the demand outlook becomes clearer.

Though manufacturing represents roughly 17% of US GDP, it often serves as a bellwether for broader economic trends. At present, the signals are ambiguous: while there are isolated signs of resilience, the sector continues to face pressure from both cost inflation and policy uncertainty, making firms hesitant to commit to new investment or hiring.

Sterling Holds Its Ground: Calm Amid Central Bank Crosswinds

The British pound continues to hold firm in early July, with GBP/USD trading near 1.374, slightly below recent highs as traders digest mixed UK economic data and global monetary signals. The pound's resilience is rooted in expectations that the Bank of England may lean toward maintaining a relatively tight monetary stance compared to its global peers, particularly the U.S. Federal Reserve. Although UK inflation has cooled modestly, it remains above the BoE’s target, adding weight to the hawkish camp within the Monetary Policy Committee.

The economic calendar for July is pivotal for the pound. The Bank of England's July meeting minutes are expected to offer deeper insight into internal policy divisions, especially with ongoing concerns about wage inflation and services sector strength. Additionally, Q2 GDP figures (scheduled for release later in the month) will be a crucial barometer of the UK economy’s post‑inflation recovery. Labour market data, including wage growth and unemployment claims, will round out the data picture and feed directly into rate expectations.

In terms of short-term outlook, GBP/USD is expected to remain within a 1.36 to 1.38 range. Stronger than expected GDP or wage data could push the pair toward the upper band, while dovish sentiment from the BoE or negative global risk sentiment could create downside pressure. With political stability largely intact and inflation gradually normalising, sterling looks likely to remain relatively steady in the near term.

Dollar on the Defensive: Fed Dovish Tilt Weighs on Greenback

The US dollar index (DXY) has weakened notably over the past month, slipping to around 96.6, its lowest level since early 2022. This decline has been driven by a combination of softer U.S. economic data, rising fiscal concerns in Washington, and shifting expectations around the Federal Reserve’s monetary policy path. As the market absorbs signs that the Fed could cut rates as soon as September, the dollar has lost ground against both the euro and sterling. Year to date, the dollar is down more than 9% versus the euro and nearly 7% against the pound.

All eyes now turn to this week’s non-farm payrolls (NFP) data, due July 3. A soft print, particularly in wage growth or participation, could reinforce dovish expectations and accelerate dollar selling. Fed Chair Jerome Powell’s remarks at the ECB’s Sintra Forum will also be closely watched. Any indication that the Fed is concerned about weakening labour trends or disinflation would weigh further on the greenback. In addition, core PCE inflation and retail sales data later this month will shape the outlook for consumer strength and policy reaction.

The USD outlook remains bearish in the near term. The dollar index could test 95.0 if NFP surprises to the downside or Powell signals a policy shift. However, a strong labour print or unexpected hawkishness could stall the decline and send DXY back toward 98.0. The fiscal backdrop, especially with renewed budget wrangling in Congress, adds another layer of uncertainty for dollar bulls.

Euro Ascendant: ECB Confidence Lifts the Single Currency

The euro has outperformed in 2025, with EUR/USD trading above 1.18, marking one of its strongest first-half performances in years. The rally has been fueled by a hawkish European Central Bank, improving Eurozone economic data, and relative weakness in the U.S. dollar. Despite geopolitical friction and uneven growth across the bloc, confidence in the ECB’s inflation-fighting resolve has drawn investors back to the single currency. Inflows into European assets have also been boosted by the bloc’s green transition investment push and long-term fiscal policy clarity.

This month’s ECB Forum in Sintra saw key officials, most notably Christine Lagarde, reaffirm the bank’s data-dependent but tightening-biased stance. The market is now pricing in at least one more hike before year-end, contingent on inflation holding above 2%. The July calendar includes German industrial output figures and Eurozone CPI, both of which will be watched for signs that the Eurozone’s recovery is broadening. Also noteworthy is the anticipated rollout of new fiscal support measures, including pan-European infrastructure and green energy initiatives, which may bolster the growth outlook.

In the near term, EUR/USD is likely to trade between 1.17 and 1.19. Should inflation remain sticky and the ECB retain a hawkish tone, the euro may continue to edge higher. Conversely, softer data from Germany or dovish pivot chatter could cap gains. The euro remains the most structurally supported of the three major currencies, though its recent rally leaves limited short-term upside unless fresh catalysts emerge.

Sterling Bulls Keep Pressure on the Dollar

The pound continues to recover against the US dollar, retracing recent losses from the previous session and trading around 1.3730 during Monday’s Asian session. The technical outlook on the daily chart remains constructive, with GBP/USD maintaining its upward trajectory within a well-defined ascending channel.

The 14-day Relative Strength Index (RSI) sits just below the 70 threshold, reinforcing bullish momentum. However, a break above this level could signal overbought conditions, raising the likelihood of a short-term pullback. Meanwhile, the pair's position above the nine-day Exponential Moving Average (EMA) supports a stronger short-term bias.

On the upside, GBP/USD is poised to challenge the 1.3770 level—its highest since October 2021—touched on 26 June. This aligns with the upper bound of the ascending channel. A decisive break above this key resistance could extend the rally, opening the door for a move towards the psychologically significant 1.3800 mark.

Initial support lies at the nine-day EMA around 1.3634. A drop below this level would weaken the immediate bullish structure and potentially see the pair test the channel’s lower limit near 1.3460, followed by the 50-day EMA at 1.3426. A further decline could expose the two-month low at 1.3139, recorded on 12 May.

Euro Inches Higher as Inflation Surprises Offset Trade Uncertainty

The euro regained ground against the dollar on Monday, reversing Friday’s dip below $1.17. Stronger-than-expected inflation readings from France and Spain, up to 0.3% (from –0.1%) and 0.6% (from 0.1%) respectively, have tempered market expectations of a September ECB rate cut, with odds falling from over 60% to just under 50%.

Attention now shifts to inflation data from Germany (due today) and the broader eurozone (tomorrow), both of which could be pivotal in shaping the ECB’s policy outlook and providing further support for the single currency.

Later on Friday, EUR/USD extended gains to $1.1754 (a fresh year-to-date high) on the back of weaker-than-expected US personal consumption figures. Although the pair held above $1.17 into the weekend, the rally was tempered as the Fed’s preferred inflation gauge, the core PCE index, rose 0.2%. While subdued spending may reflect caution stemming from President Trump’s unpredictable trade stance, the inflation reading was not soft enough to prompt a Fed pivot, reinforcing the central bank’s patient approach.

Focus now turns to this week’s US labour market data. While the dollar remains under pressure, ongoing resilience in employment could limit further euro upside. Absent a notable miss, EUR/USD is unlikely to break meaningfully higher.

Trade developments also remain in focus. The US has formalised an agreement with China following talks in Geneva, and both Washington and Brussels signalled optimism about reaching a broader deal before 9 July. With recent EUR/USD strength largely underpinned by trade-related uncertainty, any tangible progress could temper further gains for the euro.

Diverging Paths: Fed Dovishness vs BoE Caution

Sterling closed last week over 2% stronger against the dollar, lifted by broad-based dollar weakness and an increasingly dovish shift from the Federal Reserve. With a quiet UK economic calendar offering little resistance, the pound benefited from the broader move out of the greenback.

This sustained rally has even prompted a reversal in sentiment among longstanding sterling sceptics. Net positioning deeply negative at the start of the year, has now turned markedly bullish, highlighting a notable change in market tone.

Nevertheless, downside risks persist. Bank of England Governor Andrew Bailey adopted a cautious tone regarding the UK labour market. While his comments weren’t overtly dovish, markets have already priced in an 83% chance of a rate cut by August, with two full cuts anticipated by year-end.

On a nominal basis, UK rates remain higher than those in the euro area. However, stubbornly elevated inflation—headline CPI remains well above the 2% target continues to weigh on the BoE’s policy calculus, limiting the pound’s appeal as the Bank leans towards easing.

That said, real rate differentials with the US have narrowed since the start of the year, providing a layer of support for sterling. Should the Fed strike a more dovish tone, particularly if this week’s US labour data disappoints, the pound could find renewed momentum for another leg higher.

Domestically, the UK’s economic calendar is relatively light this week, with minor data releases unlikely to sway the BoE. As such, GBP price action is likely to be shaped more by external sentiment, particularly US economic and trade developments, than by domestic data.