US Jobs Data Strengthens Case for Fed Easing

Fresh US labour market data has intensified focus on economic slowdown signals, suggesting the Fed may be poised for easing amid ongoing protectionism and global uncertainty.

Job Openings and Layoffs Indicate Slowing Economy
US job openings fell to 7.18 million in July, down from a revised 7.36 million in June, falling short of the consensus forecast of 7.38 million. Meanwhile, layoffs rose sharply to 1.81 million from 1.60 million previously, with earlier data revised higher. These figures confirm a softening trend in the labour market, reinforcing concerns about broader economic growth.

Markets React to Fed Outlook
Financial markets responded quickly. Expectations for September’s Federal Reserve meeting have shifted, with easing now priced at 24 basis points, edging close to a full quarter-point cut. Confidence in a Fed move this month has rarely been stronger.

The falling quits rate further supports the case for easing. Fewer workers voluntarily leaving roles suggests easing wage pressures. With less competition for talent, companies are less likely to raise pay—a key factor the Fed will consider when assessing monetary policy.

Dollar Weakness Follows US Data
The US dollar weakened in response, with the DXY index falling as much as 0.4% on Tuesday before finding support near 98. Market sensitivity to labour data remains high, as investors seek clear evidence of tariffs’ economic impact before committing to further dollar weakness.

Euro Awaits New Catalysts

The euro regained roughly half of its losses against the dollar but remains confined within a narrow 1.5% range over the past month. Attempts to break above the 21- and 50-day moving averages have so far faltered. Tuesday’s lift was driven by softer US data, though investors are becoming increasingly selective in chasing dollar weakness.

European political tensions have yet to trigger a broader confidence crisis in the single currency, leaving bond markets as the primary outlet for fiscal concerns. With rate differentials converging towards spot levels, the euro needs a new catalyst to break out of its range—Friday’s US payroll report could provide that spark. Recent overnight volatility in EUR/USD, reflecting this anticipation, signals heightened market caution.

Despite risks, euro bulls remain cautiously optimistic. Growth expectations have improved, supported by lower energy costs and easing financial conditions. France and Spain are leading the rebound, while German manufacturing inches closer to expansion. The Ifo expectations index has climbed to its highest level since 2021, and fiscal stimulus measures are expected later this year and into 2026.

French political uncertainty may still cap gains, though the drag from OAT underperformance is easing. The euro remains exposed to sudden shocks, as December’s government collapse in Paris illustrated.

Market volatility is likely to remain elevated this month. One-week implied volatility, covering US payrolls, inflation, and the ECB meeting, has reached a two-month high. The gap between implied and realised volatility is now the widest since January, making options appear expensive as traders prepare for potential year-end resets.

Sterling Under Pressure

Sterling recouped about half of Tuesday’s losses as gilt markets stabilised following a sharp sell-off. The rebound was partially supported by weak US jobs data, yet the broader picture remains fragile.

The global rise in bond yields has weighed heavily on the UK, particularly given persistent inflation and stronger-than-expected economic data. This has forced markets to price in a more hawkish Bank of England, reinforcing the “higher for longer” narrative and exacerbating gilt market pressures. Elevated borrowing costs further challenge Prime Minister Starmer’s government as it attempts to meet strict fiscal targets.

A dovish shift from the BoE, which may not be far off, could offer some relief. However, sterling may not necessarily benefit. Markets currently assign just a 40% chance of a rate cut by year-end, leaving room for sharper downside if expectations shift.

Our outlook on sterling remains negative. GBP/EUR appears set to test support at 1.1480, while GBP/USD will be more sensitive to US data. Weaker American figures could allow short-term gains, with resistance around 1.35 representing the next key test this week.

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