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Solid US payrolls report halts dollar slide, for now

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7 July 2025

Written by
Matthew Ryan

Matthew Ryan is Ebury’s Global Head of Market Strategy, based in London, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

Solid labour data out of the US economy contradicted the slowdown narrative and effectively ended any possibility of a July interest rate cut from the Federal Reserve.

T
he dollar benefited from the resulting backup in short-term rates and managed to end near the middle of the G10 performance table for the week. The price action suggests to us that current levels price in a lot of bad news for the US dollar, which has had the worst first half of the year since Nixon took the currency off the gold standard in 1973. A notable underperformer last week was the pound, which suffered along with gilts from jitters about the state of Britain’s finances amid the growing likelihood of tax hikes in the autumn.

The paucity of major economic reports out of the main economic areas means that politics and tariffs news will be front and center. The latter, in particular, is expected to drive markets, as the three month pause on the initial tariffs announced by Trump expires on Tuesday. Markets are taking this risk in stride for now, assuming that either deals will be announced at the last minute or further extensions will be granted, as Treasury secretary Bessent has been hinting. We will also be paying very close attention to UK bond markets, as they seem to be playing the role of canary in the coal mine when it comes to the increasing unsustainability of public finances throughout the advanced world.

GBP

Markets are increasingly fretful about the UK’s apparent inability to pass even modest spending cuts. Labour MPs revolted against the trimming of welfare spending proposed by their government, and the unpleasant reaction in long-end gilts provided a second stinging rebuke to Starmer. This means that more tax increases are almost certainly on the way in the autumn, at a time when the UK labour market is already slowing markedly.

On the other hand, the pound has also fallen markedly against the euro, suggesting to us that the currency may be close to fair price. This week’s slate of macroeconomic data, notably industrial production, construction and trade, will probably be of limited impact given the time lags. We will, however, be paying close attention to Friday’s monthly GDP print for May, which is expected to show only very modest expansion following the April contraction.

EUR

Eurozone inflation continues its slow descent towards the ECB’s target, which is now actually quite close. Inflation expectations are also falling, which means there is limited room for the Governing Council to cut rates further – though probably no more than a single additional cut, as rates at 2% are already quite stimulative. As the rate cutting cycle comes to a close, the main driver for the common currency will be the gap in economic performance with the US on the one hand, and the endgame of trade with the US on the other.

We expect to see some news on the latter in the coming days. Trump’s 50% tariffs aimed at the European Union, originally set to come into force on 9th July, will now not take effect until 1st August, which offers a degree of flexibility. Speeches from a handful of ECB officials, including members Lane, de Guindos and Nagel, will also be closely watched.

USD

The US economy continues to display impressive resilience to the headwinds it is facing, and the gloomy economic forecasts. The June payrolls report dispelled any notion that the US labour market is stalling. Steady job creation was matched with a downtick in unemployment, and jobless claims numbers continue to bounce along near all time lows. Incidentally, the report gave further support for chair Powell’s wait-and-see attitude and reluctance to cut rates as Trump is aggressively pressuring him to do.

The passage of the Republican budget bill, which guarantees massive fiscal deficits as far as the eye can see, seems to have done little to move markets in the short term, but as in the UK we expect bond markets and their willingness (or lack thereof) to accommodate all this red ink to be an increasing factor in policy making in the coming months and years.

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