Markets look ahead to Friday payrolls

USD

The greenback ground lower again on Wednesday, with the DXY index slipping around 0.2% to near 99.7. The data offered little support, delivering a distinctly stagflationary mix. ADP employment rose just 44k against 65k expected, and while the ISM services index held at 54.1, its employment gauge slid into contraction at 47.4 even as prices paid climbed to 70.3. Granted, FOMC hawks have pushed back against the soft jobs signal, with Governor Cook warning she is prepared to act on a hike absent renewed disinflation, but September hike odds continue to retreat, weighing on the dollar at the margin. On the two key themes we have stressed this week, USDJPY paused in the mid-157s after the recent joint yen-buying operations, with Secretary Bessent reaffirming Washington's willingness to step in again. Meanwhile, overnight reports suggest Iran and Oman are close to finalising a Hormuz reopening, with transit coordinates agreed. Jobless claims and unit labour costs land today, but with payrolls tomorrow, we expect Gulf and intervention headlines to stay in charge.

EUR

The single currency extended its recovery on Wednesday, closing 0.2% higher, reaching its best level since mid-June. Final July PMIs were nudged higher, with the eurozone composite revised up to 52.0, corroborating last week's upside Q2 growth surprise, while producer prices fell on cheaper energy. As we noted yesterday, softer crude blunts the war-driven inflation impulse and trims urgency for the Governing Council's hawks at the margin, but with inflation having reaccelerated in July, markets still fully price one further hike by year-end, with September the central case, consistent with our own call. This morning's data adds to the constructive tone, with German factory orders up 3.1% in June ahead of eurozone retail sales at 10:00 BST. Even so, we continue to flag the Treasury's unusual euro-funded yen purchases as a downside risk if repeated, and maintain that a confirmed ceasefire, not just reopening headlines, is likely needed for EURUSD to sustain a break above 1.16.

GBP

Contrary to the downgrade risks we flagged yesterday, July's final services PMI was revised up to 52.1 from the 51.8 flash, lifting the composite to 52.2 and marking the first expansion since April, with new work rising for the first time since February and business confidence at a five-month high. Sterling was nonetheless unimpressed, adding just 0.1% and lagging its major peers on another quiet domestic session. We are inclined to side with the market here: employment fell for a 22nd consecutive month, and the confidence rebound rests heavily on hopes of Gulf de-escalation. With last week's MPC hold behind us and no meeting until September, one month's survey bounce does not change our view that soft underlying activity should keep Bank Rate at 3.75% through year-end, a persistent sterling headwind. Today's construction PMI at 09:30 BST is the only notable domestic release, leaving cable at the mercy of the dollar and broader risk appetite before tomorrow's US payrolls report.

CAD

Having lagged all week despite Tuesday's strong PMI and trade figures, USDCAD fell close to half a percent on Wednesday. This marks the pair's first decline in four sessions, helping the loonie finally catch up with broader dollar softness, even after factoring in crude, down around 10% this week on Hormuz reopening hopes. Oil itself whipsawed, with Brent briefly back above $80 after Houthi militants claimed a strike on a Saudi tanker in the Red Sea, before settling near $79 this morning. Today's domestic calendar is once again empty, leaving the pair to trade off Gulf headlines before attention turns to tomorrow's July jobs report, landing alongside US payrolls. Consensus looks for a modest gain of around 5k domestically, with unemployment holding at 6.5%, a mix likely insufficient to shift expectations that the Bank of Canada extends its hold at 2.25% next month. We still look for loonie appreciation in the medium term, but maintain that a sustained break below 1.40 requires calmer geopolitics and concrete CUSMA review progress.

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