Jobs Shock Jolts Dollar as Euro and Pound Take Centre Stage

Euro (EUR)

The euro endured a turbulent session, sliding nearly 0.4% against the US dollar at one stage. Political uncertainty in France weighed heavily, after the Prime Minister lost a key confidence vote, dampening appetite for a retest of the late-July peak at $1.1789. Adding to the pressure, a brief rally in oil prices—sparked by reports of Israeli strikes in Doha—posed an additional headwind, since higher energy costs typically hurt energy importers such as the eurozone.

Losses eased later in the day once President Emmanuel Macron named Sébastien Lecornu as the new Prime Minister, tasking him with steering the 2026 budget through parliament. The appointment helped calm nerves in the markets. Still, attention now turns to Thursday’s European Central Bank (ECB) meeting. Options data suggest traders currently view upcoming US economic releases as more market-moving than ECB policy, keeping euro volatility relatively muted.

ECB President Christine Lagarde is expected to maintain a steady stance, underlining encouraging developments such as stronger PMI surveys and falling unemployment. These factors support the view that the ECB is under little pressure to cut interest rates again soon. However, uncertainty around US–EU trade talks remains a drag on sentiment.

The euro has been one of this year’s better performers, largely on the belief that the ECB’s rate-cutting cycle has concluded. Yet markets are forward-looking, and any hint of further easing later this year—or in early 2026—could erode investor confidence. Analysts warn the single currency may struggle if expectations of renewed cuts gain traction. For now, the pound has edged higher against the euro, touching 1.1550—its strongest level in over a week—with 1.16 within sight should Thursday’s ECB meeting fail to inspire euro bulls.

Pound Sterling (GBP)

Sterling’s recent rally lost momentum after hitting a one-month high near $1.36, retreating sharply despite weaker-than-expected US payroll figures. The move was partly driven by rebounding oil prices, which increase import costs for the UK while lending some support to the dollar.

On the domestic front, UK retail sales surprised to the upside in August, rising 2.9% year-on-year against forecasts of 2%. Combined with wages continuing to outpace inflation, this provides a short-term lift to consumer sentiment.

Nonetheless, broader challenges remain: economic growth is sluggish, inflation stubborn, and fiscal pressures are unlikely to ease before November’s Autumn Statement. While elevated bond yields offer some support, markets often interpret them as a sign of economic strain rather than strength when inflationary risks persist. Investor positioning further highlights downside risks, with bearish bets on sterling increasing even though spot prices have yet to fully reflect this, leaving GBP/USD vulnerable to sentiment shifts.

The Bank of England appears in no rush to cut interest rates. Many economists do not expect a move until March 2026, which may give sterling a relative advantage over the euro if the ECB considers further easing. Still, long-term structural headwinds suggest the pound’s upside potential is limited.

US Dollar (USD)

The US dollar faced a jolt after labour market resilience—a long-standing narrative—was dealt a severe blow. The Bureau of Labor Statistics released preliminary revisions showing a staggering downward adjustment of 911,000 jobs between April 2024 and March 2025. This equates to around 76,000 fewer jobs per month than previously thought, fundamentally reshaping perceptions of US economic strength.

June’s non-farm payrolls were also revised to show a loss of 13,000 jobs—the first negative print since December 2020. Healthcare remained the only consistently strong sector, with broad-based weakness elsewhere. Most of the downward revision was concentrated in the private sector, though government hiring was also trimmed. The revisions underscore concerns over the reliability of US labour data, with response rates continuing to deteriorate.

Markets have yet to fully digest the implications, but the revision ramps up pressure on the Federal Reserve. The risk of stagflation—where inflation stays elevated while job growth falters—is now firmly on the radar. The upcoming US inflation report will be critical: a hotter-than-expected print could force traders to rapidly rethink rate-cut bets, stoking volatility. For now, markets are still pricing nearly three Fed cuts by the end of 2025, though that outlook appears increasingly fragile.

Outlook

The coming weeks could prove pivotal for currency markets. For the euro, the ECB’s Thursday meeting will decide whether this year’s resilience can hold, or whether renewed doubts over rate cuts will surface. For sterling, fiscal concerns and a sluggish economy remain key hurdles to any lasting rally, despite encouraging retail data. For the dollar, the spotlight is firmly on the next CPI release and the Fed’s September meeting, where stagflation fears will loom large.

As the final quarter of 2025 approaches, foreign exchange markets look set for heightened volatility. Economic surprises, central bank policy decisions, and political developments will all play decisive roles in shaping the euro, pound and dollar in the weeks ahead.

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