Dollar pullback
The US dollar weakens after soft payrolls data drives a repricing of Fed expectations, while EUR and GBP gain amid USD pressure, with markets focused on ISM Services and FOMC minutes.
USD
The US dollar begins the week on the back foot after a disappointing June payrolls release late last week triggered a sharp repricing of Federal Reserve expectations. Markets had entered July focused on the Fed’s relatively hawkish June projections but weaker labour-market data prompted investors to reduce the probability of another near-term rate increase. As a result, the dollar surrendered gains across G10, with EUR/USD pushing back above 1.14 and GBP/USD moving towards 1.34. The move was consistent with our recent reactive pieces, which highlighted that USD resilience remained highly dependent on continued evidence of labour-market strength and sticky inflation.
Today’s focus is the US ISM Services survey, which will be the first major opportunity for markets to test whether the payrolls weakness represents a broader slowdown or merely a temporary soft patch. Beyond today, attention will increasingly shift towards Wednesday’s FOMC minutes. We continue to expect rates and relative growth differentials to remain supportive for the dollar over the medium term, but after last week’s data surprise, markets will require stronger evidence before rebuilding long-USD positions. Volatility is likely to remain elevated as investors reassess the Fed’s path ahead of the July meeting cycle.
EUR
The euro recovered modestly against the dollar into the end of last week, although the move was driven more by broad USD weakness than renewed confidence in the single currency. EUR/USD benefited from falling US yields and softer payrolls data, but EUR crosses generally remained under pressure, with GBP/EUR trading around fresh 2026 highs. This remains broadly consistent with our Week Ahead thinking that Eurozone fundamentals are improving only gradually and that falling inflation is reducing expectations for additional ECB tightening in the near term.
The week ahead is relatively light for the Eurozone itself, meaning EUR trading is likely to be driven largely by US developments and global risk sentiment. Markets continue to digest the combination of softer inflation and subdued growth momentum across the bloc. While ECB officials remain reluctant to signal the end of tightening discussions altogether, recent communication has suggested a greater degree of confidence that inflation risks are becoming more balanced. For EUR/USD, the near-term question is whether the pair can hold above recent gains should US data stabilise. For EUR/GBP, the balance of risks still appears skewed towards continued sterling outperformance unless Eurozone data surprises materially to the upside.
GBP
Sterling starts the week from a position of strength after extending gains against both the euro and the dollar. GBP/EUR traded at fresh highs for 2026 late last week, while GBP/USD benefited from the broad retreat in the US dollar following softer payrolls data. Importantly, this strength has not been driven by a significant improvement in UK data but rather by a combination of resilient domestic fundamentals, fading political concerns and a supportive interest-rate backdrop. The Bank of England remains one of the more restrictive G10 central banks, helping sterling maintain its yield advantage over the euro in particular.
The focus this week shifts towards the Bank of England’s Financial Stability Report and broader global developments. With the next MPC decision not due until the end of July, domestic catalysts are relatively limited, meaning sterling will continue to take its lead from developments in the US and Eurozone. We remain constructive on GBP relative performance, particularly versus the euro, but near-term positioning now looks increasingly stretched. As we highlighted in recent outlook discussions, sterling’s gains may become harder to extend without either renewed UK economic surprises or a further deterioration in the dollar outlook. Nonetheless, the broader backdrop remains supportive, with investors continuing to buy GBP on dips rather than sell rallies.
CAD
The Canadian dollar outperformed several G10 peers into the end of last week, supported by a weaker US dollar and a generally constructive risk environment. USD/CAD moved lower as investors reduced expectations of further Fed tightening, narrowing some of the policy divergence that had previously favoured the greenback. At the same time, stability in broader commodity markets helped cushion the loonie despite ongoing concerns around global growth. Recent price action has reinforced our view that CAD remains more sensitive to USD dynamics than domestic factors in the short term.
Looking ahead, Canadian labour-market data on Friday will be the key domestic event of the week. Markets will be watching closely to see whether Canada experiences similar signs of cooling employment momentum to those recently seen in the United States. The currency will also remain sensitive to developments in energy markets following OPEC+ production decisions and continued normalisation in Middle East supply conditions. For now, the combination of softer US rate expectations and stable risk sentiment argues for continued CAD resilience. However, any rebound in US economic data or a more hawkish signal from Wednesday’s FOMC minutes could quickly reverse recent USD/CAD weakness and remind markets that North American monetary policy remains closely interconnected.