US payrolls in focus, with solid gains expected

USD

The dollar extended its advance yesterday, with the DXY breaking above 102 to reach its highest level since April 2025, helped by a combination of better data, bond market gyrations, and Middle East concerns. Indeed, the ISM manufacturing prices paid index jumped to 77.9, its highest since May, while initial claims fell to 197k, pointing to ongoing domestic resilience. At the same time, upward pressure on French and Italian yields specifically saw haven flows dominate through yesterday afternoon as bond markets fretted over fiscal recklessness. From a dollar perspective, that mix more than outweighed Fed speakers, who again struck a patient tone. Kashkari held no strong view on October, and Jefferson suggested the FOMC may need more time, reinforcing comments earlier in the week from Williams and Waller. Today, however, is all about payrolls at 13:30 BST. Consensus looks for around 90k, with unemployment at 4.1% and earnings up 0.3%. We see marginal downside risks to the headline, in the 60-80k range, but think an in-line print keeps October live and the dollar bid ahead of CPI.

EUR

EURUSD slipped below 1.13 yesterday, its fourth straight loss, threatening to break sub-1.12 overnight before stabilising this morning. As we flagged earlier in the week, hot national inflation prints have offered the euro little protection. Instead, energy and fiscal risks are in the driving seat, and both deteriorated. Brent's return above $100 is a clear terms of trade hit for the bloc, while France's 2027 budget, targeting a deficit of around 5% of GDP from 5.4% this year, did nothing to calm bond markets. Ten-year OAT yields rose towards 5%, their highest since 2002, and the spread to Bunds widened beyond 130bp, the widest since the eurozone debt crisis. Against that backdrop, hawkish ECB repricing is hard to come by, with Schnabel having argued that higher market yields are doing some of the Bank's work, leaving October largely unpriced and December the live meeting. Today brings flash eurozone CPI at 10:00 BST, where we and consensus expect headline inflation to jump to 3.7% from 3.2%, with core at 2.5%. An upside surprise would help at the margin, but with payrolls looming, we see risks of a test of 1.12 before any meaningful bounce.

GBP

Sterling could not escape the dollar's pull yesterday, falling around 0.4% to test 1.32 overnight - its weakest since late June, though it held its ground against a softer euro. Bond markets were once again the driver. Thirty-year yields rose above 6% for the first time since 1998 as the global bond rout intensified, with Gilts caught in the crossfire as traders took aim at France and Italy after the former showed little willingness to deliver fiscal consolidation in the 2027 budget. That should, we think, be a warning for the UK, ahead of October 28th, with Andy Burnham’s government facing its own difficult spending choices. Indeed, it is with this in mind that we see sterling biased to the downside as the Autumn budget draws closer. But for today, cable will most likely take its cue from the DMP at 09:30 BST this morning, and US payrolls later in the afternoon.

CAD

The loonie finally showed signs of stabilisation on Thursday after a rough end to September. Oil's rally above $100 provided an offset to domestic data, which saw Canada's manufacturing PMI slip to 51.5, down from 53.0, adding to the message from flat July GDP that momentum is fading. Still, with the Bank of Canada at 2.25% against a Fed at 3.75-4.00%, and nothing in the recent data to justify a move on October 28th despite Macklem's hawkish rhetoric, the two-year spread remains stretched near 150bp and continues to anchor the pair at elevated levels. There is no Canadian data today, meaning the loonie will trade entirely off US payrolls and risk sentiment. We expect our 1.41-1.43 range to hold, with a soft print being the more likely trigger for a dip toward the bottom of it. The next domestic test comes with the September jobs report on October 9th.

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