Markets on edge ahead of payrolls data

The dollar index has been marking time since the sharp fall at the beginning of August, when a softer-than-expected non-farm payrolls report dragged it below the 100 mark. For most of the month it has been hemmed in between 97.50 and 98.50, with little clear direction. The shift reflects a change in how investors digest political headlines – particularly those involving Donald Trump. Tariff threats are no longer treated as automatic negatives for the greenback; instead, markets are weighing them against wider macroeconomic signals.

Take the recent case of a 50% tariff slapped on India, the steepest yet on a developing economy. The dollar initially ticked higher before easing back as traders considered the likelihood of Indian retaliation. Not long ago such an announcement might have sparked a sharper sell-off. Today, risk premia are increasingly being folded into fundamentals. The dollar ended the week slightly firmer, with most of the data still supportive.

Controversy around Federal Reserve Governor Lisa Cook has barely rippled through markets, as legal hurdles have kept speculation in check. The real focus is further ahead – on the risk of a more dovish tilt once Jerome Powell’s successor is chosen in 2026. At Jackson Hole, Powell hinted at a 25 basis point cut in September, citing labour market weakness. Investors remain cautious, though, pricing in about an 80% chance. The data so far has not been consistently soft enough to warrant aggressive easing, while the risk of tariff-driven inflation lingers in the background.

Friday’s jobs release is likely to be pivotal. A stronger number could propel the dollar index back towards 98.50 resistance. While risks are tilted to the downside, there may still be scope for short-term gains into early September – with higher levels offering a better entry point to sell the dollar.

Euro takes its cue from US payrolls

The euro shed 0.4% last week, unsettled by political tensions in both France and the Netherlands. While widening bond spreads rarely drive the single currency on their own, the latest unrest reinforces the view of a fragmented bloc ill-prepared to deal with Trump’s protectionist stance, weighing further on sentiment.

Nevertheless, the main driver remains the dollar. With the greenback treading water through August, EUR/USD has been confined to a narrow band between 1.16 and 1.17. The euro’s earlier rally this month was sparked by weak US labour figures on 1 August, but resilience in subsequent data capped upside momentum. Technicals have since soured, with the 21-day moving average slipping below the 50-day, confirming a bearish crossover. Non-farm payrolls could prove decisive: a weak print may revive euro strength, but a solid release could drag the pair beneath 1.16. Until then, consolidation within the current range appears most likely.

On the ECB front, the latest minutes reaffirmed a cautious stance. Policymakers remain concerned over sluggish growth and subdued inflation, but no immediate moves are expected. This leaves the euro largely neutral to ECB repricing in the short term, with attention firmly fixed on US data and trade developments.

Risks from EU–US trade talks also linger. The bloc’s attempts at concessions could backfire, as seen in July when poorly framed terms knocked one per cent off the euro. Even so, sentiment is not entirely negative. If US data softens and trade tensions calm, EUR/USD could retest the 1.18 highs of July – back then, as now, it was the Fed’s dovish leanings that gave the euro lift. Conditions are more fragile today, but the possibility of another push higher remains.

Eurozone inflation figures will also be worth watching this week. Only a notably weak print would sway markets, particularly after Germany’s upside surprise and the recent upward revisions to ECB expectations.

Sterling contends with seasonal pressures

Sterling has managed a modest rebound, helped by stronger UK economic data, rising expectations of a more hawkish Bank of England, and firmer risk appetite. After sliding 4% in July, GBP/USD regained more than 2% through August, consolidating between 1.34 and 1.36.

Yet seasonal pressures remain a concern. September has traditionally been a difficult month for the pound, with average losses of 0.5% and declines of over 2% in the past five years. The broader third-quarter trend is also weak, with sterling posting a median fall of nearly one per cent against the euro and just over one per cent against the dollar over the past decade. This pattern appears to be repeating in 2025.

The recent bounce looks more like a correction of excessive pessimism than the start of a sustained recovery. Fiscal uncertainty ahead of the autumn budget, coupled with the risk that BoE repricing reflects stubborn inflation rather than genuine growth momentum, may cap further gains. While the latest data has softened the bearish tone, it has not completely overturned it. This week, retail sales and final PMI releases will be in focus, helping to determine whether sterling’s rebound still has room to run.

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