Dollar Slips on Weak US Jobs Data as Markets Brace for Inflation Test

Sterling (GBP)

The pound staged a strong rally following the disappointing US jobs report, briefly testing resistance at 1.3550 before easing back to close around 1.3500. This was sterling’s best daily performance in two weeks and lifted the currency back above key technical averages. With momentum indicators currently neutral, there is room for further gains if conditions remain supportive.

That said, the UK’s domestic backdrop remains fragile. Concerns over stagnant growth and rising fiscal pressures continue to hang over the economy, factors that could weigh on the pound over time. For now, however, this is largely a dollar-driven move, with shifting expectations for Federal Reserve policy overshadowing UK fundamentals. Should US inflation data surprise on the upside, the dollar may quickly recover, capping sterling’s near-term momentum.

On the policy front, the Bank of England has taken a more cautious tone on rate cuts. Governor Andrew Bailey recently stressed uncertainty over how quickly inflation is falling, a stance that has kept UK short-term yields relatively well supported versus European peers. This has provided the pound with an additional layer of support.

US Dollar (USD)

The US dollar weakened sharply after the latest employment figures showed that just 22,000 jobs were created in August, well short of the 75,000 forecast. To make matters worse, previous months’ data was revised down by 21,000, reinforcing the view that the American labour market is losing momentum.

This has fuelled speculation that the Federal Reserve may deliver a half-point rate cut at its next meeting. Short-dated bond yields slipped as traders priced in a more aggressive easing path. The dollar’s losses were most notable against sterling, with GBP/USD jumping from 1.3450 to 1.3500 in the aftermath of the report.

While the greenback has shown resilience for much of the year, weaker jobs data raises doubts over whether that strength can continue. However, persistently high inflation still limits the Fed’s scope for aggressive policy loosening, suggesting any downturn in the dollar may prove temporary.

All eyes are now on the upcoming US CPI release. Softer inflation would bolster the case for deeper rate cuts and add to dollar weakness, while stronger core readings could stabilise the currency and rein in expectations for easing.

Euro (EUR)

The euro also benefitted from the dollar’s slide, breaking decisively above the 1.16–1.17 range after the US data. With the European Central Bank (ECB) widely expected to leave policy unchanged this week, euro strength appears to reflect dollar weakness rather than fresh European drivers.

That said, investor appetite for hedging against further euro gains has been muted, with political risks and ongoing trade tensions with the US still clouding the outlook. EUR/GBP briefly advanced after the jobs release, though the move faded, with the Swiss franc seeing stronger safe-haven demand. This suggests that investors are spreading exposure rather than relying solely on the euro in periods of uncertainty.

Short-term euro rates should remain steady if the ECB confirms the end of its rate-cutting cycle, offering modest support. However, the broader trajectory of the single currency will ultimately hinge on US inflation and dollar dynamics.

Outlook

The global spotlight is firmly on Thursday’s US CPI report, which will likely set the tone for markets through the rest of September. A softer print would deepen dollar losses and support further gains for both sterling and the euro. Conversely, a hotter reading could trigger a sharp reversal and restore dollar strength.

In the UK, Friday’s GDP release will be the key domestic focus, with growth expected to have stalled in July. Across Europe, the ECB’s policy meeting is also in view, though no change is anticipated.

Overall, near-term momentum continues to favour dollar weakness, but the balance between US inflation data and Fed policy will determine whether the recent shifts mark the start of a broader trend or simply a short-lived correction.

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