A tentative dollar rally came to a sudden end on Friday following the release of the weak August labour market report, which suggests that the great US jobs machine is grinding towards a near total halt.
Markets quickly priced in cuts in the three remaining Federal Reserve meetings left in 2025, bonds rallied and stocks sold off. While the weakness in the US labour market is undeniable, we note that the response remained relatively muted outside of the Treasury market, and the dollar and stock markets ended the week not far from where they started it. All in all, the dollar so far remains resilient to its main two headwinds: institutional degradation in the US and the clear slowdown in the US economy.
While the underwhelming payrolls report means that the outcome of the September Fed meeting next week is now done and dusted, investors will still be paying close attention to the US inflation report for August on Thursday. The European week will be dominated by the September ECB meeting, but we expect the central bank to try to make this as much of a non-event as possible. A wild card for markets will be the possibility of further developments in the legal process by which Trump is trying to fire Fed governor Lisa Cook.
GBP
The relentless rise in long term gilt yields took a breather last week, aided by the attractive levels at which UK sovereign bonds can now be bought and the soft US labour market report, which has reignited fears of a global slowdown and subsequent central bank cuts. The chaotic reshuffling of Keir Starmer’s cabinet following the resignation of deputy PM Angela Rayner has not changed the narrative around sterling, particularly as Rachel Reeves has clung onto her role as chancellor. The needle now swings to the Autumn Budget announcement on 26th November. Further tax hikes are as certain as death and taxes themselves, but investors will be crying out for this to be accompanied by spending cuts.
Sterling continues to lose ground against the currency of the UK's main trade partner, the Eurozone, on fears about stagflation and the lack of fiscal credibility from the wobbly Labor government. This week the focus will be on a rich spate of macroeconomic data, albeit from the month of July and therefore somewhat lagged. The Bank of England will be meeting next week, but there is effectively no chance of any change in rates.
EUR
The September ECB meeting may be this week, but it is being almost completely overshadowed by the drama around the French budget. As in the UK, the inability of the government to carry out even modest spending cuts is causing turbulence in the bond market. However, the denouement may be more dramatic in the French case, as the government has threatened to resign in the event that cuts are rejected by Parliament, as seems likely. We won’t have to wait long to find out, with the confidence vote set to be held later this evening.
With inflation back on target and little economic news this week, we expect that the French situation will be the focus of Lagarde's post meeting conference. We are unlikely to see any notable shift in her guidance, particularly given the uncertainty surrounding the US-EU trade deal and Germany’s stimulus package, which are not set to be reflected in economic data immediately.
USD
The US labour report for August put to rest the debate as to whether the jobs market is stalling. Only 22k net jobs were created in the month, which is essentially a rounding error. Further, the revisions to past months numbers were negative again, and June turned out to be the first month that saw a net jobs loss since the COVID pandemic. Unemployment ticked up, and wage gains were anemic.
The negative impact of Trump's tariffs on the economy is now undeniable, as manufacturing employment has shrunk for the fourth month in a row and business surveys invariably mention tariff related disruption as a major headwind. With a Fed cut in rates guaranteed later next week, all eyes are now on the September CPI inflation report. This is expected to show yet another month of above target inflation and confirm that the US is in the midst of full on stagflation.
Deep dives and expert insights:
- G10 currency market report- Get the latest analysis on major currencies.
- FX Monthly - September- Trump assaults Fed autonomy
- Webinar: Fed autonomy at stake: A dollar paradigm shift?- Reserve your spot!
