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Solid payroll report halts dollar slide -for now

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7 July 2025

Written by
Enrique Díaz-Álvarez

Chief Economist

Solid labor data out of the US contradicted the slowdown narrative and effectively ended any possibility of a July interest rate cut from the Federal Reserve.

T
he dollar benefitted from the resulting backup in short term rates and managed to end up near the middle of the G10 performance table for the week. The price action suggests to us that current levels price in a lot of bad news for the US dollar, which has had the worst first half of the year since Nixon took the currency off the gold standard in 1973. A notable underperformer last week was the Pound, which suffered along with Gilts from jitters about UK state finances, in a sobering reminder of the Lizz Truss debacle.

The paucity of major economic reports out of the main economic areas means that politics and tariffs news will be front and center. The latter in particular is expected to drive markets, as the three month pause on the initial tariffs announced by Trump expires Tuesday. Markets are for now taking this risk in stride, assuming that either deals will be announced at the last minute or further extension will be granted, as Treasury secretary Bessent has been hinting. We will also be paying very close attention to UK bond markets, as they seem to be playing the role of canary in the coal mine when it comes to the increasing unsustainability of public finances throughout the advanced world.

GBP

Markets are increasingly fretful about the UK’s apparent inability to pass even modest cuts. Labor MPs revolted against the trimming of welfare spending proposed by their government, and the unpleasant reaction in long end Gilts provided a second stinging rebuke to Starmer. This means more tax increases are probably coming, at a time when the UK labor market is slowing markedly. On the other hand, the Pound has also fallen markedly against the Euro, suggesting to us that the currency may be close to fair price. This week’s slate of May macroeconomic data (GDP, industrial production, construction, trade) will probably be of limited impact given the lags.

EUR

Eurozone inflation continues its slow descent towards the ECB target, which is now actually quite close. Inflation expectations are also falling, which means there is limited room for the ECB to cut rates further – though probably no more than a single additional cut, as rates at 2% are already quite stimulative. As the rate cutting cycle comes to a close, the main driver for the Euro will be the gap in economic performance with the US on the one hand, and the endgame of trade with the US on the other. We expect to see some news on the latter this week as the July 9th tariff deadline is already upon us.

USD

The US economy continues to display impressive resilience to the headwinds it is facing and gloomy economic forecasts. The June payroll report dispelled any notion that the US labor market is stalling. Steady job creation was matched with a downtick in unemployment, and jobless claims numbers continue to bounce along near all time lows. Incidentally, the report gave further support for chair Powell’s wait and see attitude and reluctance to cut rates as Trump is aggressively pressuring him to do. The passage of the Republican budget bill which guarantees massive fiscal deficits as far as the eye can see seems to have done little to move markets in the short term, but as in the UK we expect bond markets and their willingness (or lack thereof) to accomodate all this red ink to be an increasing factor in policy making in the coming months and years.

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