Rates consternation boosting the buck
Soft US September payrolls sharply reduced expectations of an October Fed hike, but the dollar strengthened as Middle East tensions and French fiscal concerns drove safe-haven demand.
USD
Friday's September payrolls report landed even softer than our already below-consensus call, with just 29k jobs added against the 90k expected, unemployment up to 4.2%, and average hourly earnings slowing to 0.1% MoM and 3.0% YoY. As we argued in our reaction piece, that should take an October hike off the table. Markets seemingly agree: pricing for a move on 28th October has collapsed from around 70% a week ago to below 20% this morning, with December now the base case, a view already hinted at last week by a majority of Fed speakers. Even so, the resulting dollar dip has proven fleeting. The DXY has pushed highs not seen since April 2025 through early trading today, with politics doing the heavy lifting. On the geopolitical front, Iran's Ghalibaf said the Strait of Hormuz stays shut until Tehran's seven conditions are met, Araghchi warned Iran is "more prepared than before" if fighting resumes, and the Houthis claimed strikes on an Aramco facility near Riyadh. Meanwhile, fiscal concerns centred on France have seen OATs under renewed pressure, with spillovers weighing not just on the euro, but on risk-sensitive FX more broadly. Those dynamics provide the backdrop to ISM services at 15:00 BST this afternoon, although with safe-haven flows dominant, only a sharp miss should dent the greenback.
EUR
The euro was last week's clear G10 laggard. EURUSD fell for a fourth straight week, closing in the mid-1.12s. That downside has continued this morning too - overnight the pair broke into the 1.11s, its weakest since May 2025, with French fiscal stress the primary driver. The 2027 budget targets a deficit still close to 5% of GDP, the left has pledged a censure motion, and with Le Pen's National Rally holding the balance, 10-year OAT yields are flirting with 5%, leaving the Bund spread at its widest since the eurozone debt crisis. Hot September flash HICP at 3.8% has not helped; further tightening risks amplifying sovereign stress rather than supporting the euro. Today brings final services PMIs at 09:00 BST, Sentix at 09:30 BST, and ECB speakers Nagel, Lane and Schnabel, who we now expect to lean against aggressive hike pricing. With Middle East risks still bidding the dollar, rallies look likely to be sold, and 1.11 is the next downside marker.
GBP
Sterling had a better Friday than most. Cable tested 1.32 ahead of payrolls, before extending higher on the US soft data, while rallying more than 1% on the week against the euro. That resilience owes much to the BoE: with a majority of the MPC now flagging second-round effects, markets price in roughly 30bps of tightening by year-end, a cushion the euro lacks. Still, with 30-year yields having breached 6% for the first time since 1998 earlier in the week, we think this remains the pound's soft underbelly as the 28th October Budget approaches. Chancellor Healey's headroom has been eroded by higher yields, but sterling is yet to receive the same treatment as the euro, despite similar fiscal incontinence. We see 1.32 holding for now, but a renewed gilt sell-off on Middle East-driven energy spikes, or more likely on growing Autumn budget concerns, would quickly change that.
CAD
The loonie failed to capitalise on a soft US jobs report, with USDCAD climbing on Friday, up around 0.5% on the week. Two factors explain the underperformance. First, oil sold off, with Brent down more than 2% at one stage as the G7 agreed to release 100 million barrels of crude and diesel and Gulf exports excluding Iran climbed back above pre-war levels, blunting the loonie's usual tailwind from Middle East hostilities. Second, the dollar's post-payrolls dip reversed quickly as risk sentiment soured. That upward USDCAD trend has extended this morning, with Brent softer again at around $101, despite Iran insisting Hormuz stays closed. Looking ahead, with no domestic data today, USDCAD should take its cue from ISM services and oil, ahead of Friday's jobs report, where consensus looks for +9k after -42k; we expect a soft print that rules out a hike at the 28th October decision. Our 1.41–1.43 range held last week, but is now being tested from above.