Good morning. The dollar is holding firm even after Thursday’s disappointing non-farm payrolls report triggered a pullback in Federal Reserve tightening expectations. American employers added just 57,000 workers in June, far short of the 115,000 forecast, and revisions lopped a combined 74,000 from the previous two months. The unemployment rate fell to 4.2%, but not because of a pickup in hiring—labour-force participation dropped to 61.5%, its lowest since March 2021. With a no-hire, no-fire equilibrium persisting and wage pressures seen remaining contained, investors are placing 20% odds on a hike in July and 45% on a move by September, down modestly from levels seen last month.
Bets on a hawkish pivot could re-intensify on Wednesday when the Fed releases minutes from its June meeting. How much detail the record contains is an open question—Chair Warsh’s well-documented dislike of overcommunication may produce a more terse account than markets have grown accustomed to—but the tone is nonetheless likely to read as hawkish, given that the discussion took place after several hotter-than-anticipated inflation and employment reports, but before the signing of the US-Iran memorandum of understanding. At the time, officials submitting economic projections and participating in the policy debate were focused squarely on upside risks to inflation.
We think this should be considered stale information. Although underlying price pressures remain intense, breakevens are pointing to a sharp decline in realized inflation in the months ahead, with headline measures seen rolling over within months as tariff- and war-related price effects wear off. We still expect the Fed to stay on hold this year, and think markets could pull back on tightening expectations as momentum slows and softer data accumulate in the months ahead.
Global oil demand and supply dynamics are playing a surprisingly positive role in easing inflation pressures. Brent fell another 1% this morning to less than $72 a barrel after the Opec+ countries agreed to increase production quotas by 188,000 barrels a day from August, following similar-sized increases in June and July. Although credible estimates suggest Gulf oil exports amounted to just 3mn barrels a day in June—nearly 40% below pre-war levels—global demand fell sharply during the conflict as importing countries rationed supplies, tapped reserves, and curtailed exports of refined products, with little sign of a sustained rebound. Reserve managers in most countries are expected to wait at least a year before beginning to refill, meaning commercial users will remain the dominant source of demand for some time — and that markets could once again find themselves contending with a production glut.
The Canadian dollar is trading sideways ahead of Friday’s labour-force survey, which is expected to show hiring moderating from May’s surprisingly-strong 87,800-job gain. The report is notoriously volatile and could prove more difficult to read than usual, with census-related public-sector hiring and part-time positions tied to the FIFA World Cup flattering the headline*. The underlying picture is unquestionably one of cautious stasis, with businesses reluctant to hire until a clearer outlook emerges from the USMCA trade negotiations. But there are tentative signs of stabilisation in housing market activity, a firming in consumer demand, and a strengthening fiscal impulse emerging—green shoots that, if sustained, could shift narratives in the loonie’s favour later in the year.
The euro and British pound are rangebound ahead of a raft of political headlines later this week:
In Paris, the Court of Appeal will rule tomorrow on Marine Le Pen’s challenge to a ban on holding public office, imposed after her conviction for misusing European Parliament funds. Traders view her National Rally movement as a potential destabilising force in the common currency area, and a ruling in her favour could unsettle the bid for French government debt.
In London, the Labour Party will open nominations for those wishing to challenge Andy Burnham in the race to replace Keir Starmer as prime minister. Investors expect a coronation rather than a contest that might force Burnham to offer concessions to the party’s left, but are uncertain as to who he will nominate to succeed Rachel Reeves as chancellor, with the outcome likely to drive a modest recalibration in the fiscal risk discount embedded in gilt markets and the pound.
President Trump will attend the NATO summit in Ankara tomorrow and Wednesday. We don’t expect a seismic event on the scale of JD Vance’s address at last year’s Munich Security Conference, but he is likely to sharply criticise allies for insufficient support for the war in Iran, and the headlines that emerge could shift fiscal-policy expectations across the major European economies.
On balance, the near-term path of least resistance is for the dollar to hold firm into the middle of the week, with the June Fed minutes likely to provide a hawkish tailwind before softer data reassert themselves and a repricing gets under way. The euro, pound, and yen look more exposed to two-way headline risk than to any clean directional trend, given the density of political events and steadily intensifying pressure on Japanese currency markets. The loonie, by contrast, still screens as severely oversold, with trade-related uncertainties obscuring a modest improvement in underlying fundamentals. The USMCA negotiations are unlikely to reach a tidy conclusion any time soon**, making a dramatic rally improbable in the near term—but a firming bias could emerge, wrongfooting increasingly-vocal forecasters expecting an extreme depreciation trend.
As JG Ballard once put it: “A general rule: If enough people predict something, it won’t happen”.
*In the US, where a larger number of venues are involved, the leisure and hospitality sector shed 61,000 jobs last month.
**Or, frankly, ever.