shorts have been trimmed as global long-dated bonds have faced pressure this week. But we don’t see this overshadowing the data and Fed drivers for the dollar, and the move may be unwound in the coming days. Similarly, we don’t think the has much more to fall from domestic bond pressure. Today, US job data can have a substantial market impact
USD: Dollar Rally May Be Unwound
Yesterday’s dollar rally lacked a clear catalyst beyond the selloff in global long-dated bonds – including the high-profile UK gilts (more on GBP below). Rising debt concerns outside the US may have triggered some unwinding of abundant USD longs. Still, we doubt this will provide sustainable support to the dollar ahead of key data releases and imminent Fed easing.
Jobs-related data now carries even greater weight after Fed Chair Jerome Powell’s de facto admission that employment risks have overtaken concerns. Market attention may also sharpen on data beyond official , especially given potential credibility questions after Trump’s appointment of a new BLS chief.
Today’s report is therefore important. Job openings are expected to have edged lower in July, but we are still well above the seven million average for 2018-19, which could warrant major concerns. Changes in layoff figures could have a bigger impact. So far, the narrative points to job market stagnation after a few exceptional years; layoffs need to remain low to avoid a faster dovish repricing.
The Fed’s , also due today, will provide regional insights – particularly on tariff-related price pass-through. We’ll also hear from hawkish-leaning FOMC voter Alberto Musalem.
We don’t see a strong fundamental case for yesterday’s dollar momentum and expect some downside risk for the today as that move unwinds ahead of Friday’s payrolls.
EUR: Inflation Supports the ECB’s Cautious Stance
remains cheap according to our model, which places the short-term fair value around 1.190. While French geopolitical risk may keep the euro from rapidly reconnecting with stronger rate differentials, we think the impact of OAT underperformance on the euro has likely run its course – as discussed here.
Yesterday’s slightly hotter-than-expected numbers (2.3%) in the euro area brought the two-year EUR swap rate back above 2.10%. The implied probability of an ECB cut by year-end is now only one in three. While we think that is too conservative, it may take some time for a dovish repricing and any negative euro impact to materialise, considering multiple reiterations by ECB officials that they are in a good place when it comes to rates.
It’s quite likely that any potential policy comment by ECB President Christine Lagarde at an ESRB event today will reinforce this cautious stance. We think EUR/USD has some ground to recover after yesterday’s drop, with a return above 1.170 quite possible in the next few days.
GBP: Reaction to Gilts Selloff Looks a Bit Overblown
The had a rough Tuesday as back-end gilt yields rose, with the hitting its highest level since 1998. It’s important to note, though, that the long-dated bond selloff was happening across Europe yesterday, and gilts didn’t underperform their peers. Yesterday’s 0.7% rise in highlights just how sensitive the pound is to yield increases, but we take a conservative view and don’t expect the pound to fall much further on gilt moves alone.
While the rise in back-end yields is getting a lot of attention amid scrutiny of the UK fiscal situation, much of the increase is tied to higher inflation and hawkish repricing of Bank of England rate expectations rather than fiscal worries.
Demand for extra-long-dated debt (like 30-year gilts) has been weak across developed markets, but a 10-year gilt auction attracted very strong demand, raising a record £14bn. That doesn’t support the idea that fiscal concerns are outweighing inflation and BoE repricing in driving yields higher.
We’re not optimistic on the pound as we still expect the BoE to cut rates by year-end (more here), but the moves in back-end gilts don’t seem dysfunctional and don’t justify a persistent risk premium on sterling, especially given the UK government’s likely fiscal consolidation plans. For now, we think EUR/GBP belongs below 0.870.
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