Weak US payrolls tempered by Middle East concerns
The euro was a principal beneficiary of Friday's payrolls shock, with EURUSD rallying into the mid-1.15s post-release.
USD
Friday delivered the tail scenario we flagged, with July payrolls printing at -23k against 80k expected and below all sell-side estimates, compounded by a combined 103k of downward revisions to the prior two months. Unemployment dipped to 4.1%, but with the decline once again more than explained by falling participation, we saw the report as unambiguously dovish while reinforcing our concerns around data quality; September hike odds slid from 55% to roughly 40%, taking the dollar down around 0.4%, leaving the DXY near 99.6, close to its lowest since early June. The buck has nonetheless started the week slightly firmer after weekend Hormuz diplomacy disappointed, seeing Tehran rule out direct talks with Washington, lifting Brent by around 1% overnight. USDJPY's creep back above 158, meanwhile, keeps us asking when authorities might repeat July’s yen-buying intervention. All told, this mix poses two-sided risks for the buck, but with Wednesday's CPI in focus near-term, we continue to see dollar risks skewed asymmetrically downward over coming days.
EUR
The euro was a principal beneficiary of Friday's payrolls shock, with EURUSD rallying into the mid-1.15s post-release. The single currency's own newsflow did little to help, mind, after last week's soft retail sales and German industrial production rounds took the shine off an otherwise decent run that included 0.4% flash Q2 growth. This morning the pair consolidates as crude's renewed rally delivers another unhelpful terms-of-trade shock, keeping war-driven inflation risks alive for an ECB that paused in July, having hiked in June for the first time since 2023, with a September move firmly on the table. We remain of the view that soft US data alone is unlikely to sustain a break above 1.16 (a confirmed Hormuz reopening is probably needed), and the weekend's stalled negotiations only reinforce that view. Today's Sentix survey opens a thin domestic docket ahead of Friday's employment readings, none of which are likely to move markets. Gulf headlines and Wednesday's US CPI should therefore dominate, with 1.15-1.16 continuing to contain price action.
GBP
Sterling remained a passenger on Friday, albeit a well-treated one, with cable briefly threatening 1.35 before trimming gains. Overnight brought some rare domestic cheer, however, as the REC survey we flagged on Friday showed hiring at British businesses held steady in July, with the report indicating broad signs of improvement, albeit from a low base. Even so, we doubt survey data shifts the dial before September 17th, with no change in Bank Rate still overwhelmingly favoured. Thursday's Q2 GDP is the week's other domestic highlight, where consensus looks for around 0.4% growth following Q1's 0.6% expansion, a resilient outturn given the war shock. Until then, sterling stays hostage to external events, with cable risks tilted modestly higher given our dollar view.
CAD
Having tipped Friday's Labour Force Survey to play second fiddle to US payrolls, we were only half right. The domestic report smashed expectations, with employment up 75k and unemployment down to 6.4%, tempered only by permanent employee wage growth, which cooled to 3.0% YoY. Paired with negative US payrolls, the divergence saw USDCAD break the 1.40 threshold, leaving the softer Ivey PMI at 55.1 a footnote. Still, we continue to think a sustained break lower needs calmer Gulf geopolitics and concrete trade progress, and neither arrived over the weekend. This morning's crude rally helps at the margin, but intense talks continue ahead of the August 19th deadline for additional US tariffs. With a quiet domestic calendar for the week ahead, tariff headlines and Wednesday's US CPI are the loonie's key catalysts, and we expect consolidation just south of 1.40 for now.