EUROPEAN FX UPDATE: USD is softer ahead of payrolls, GBP digests encouraging retail sales

USD: DXY -0.2%; 98.06

• After a resilient showing in the wake of soft labour metrics yesterday, DXY is on the backfoot in the run up to the August payrolls report. As a reminder, yesterday saw an increase in Challenger layoffs, a soft ADP print and a larger-than-expected increase in weekly claims data. Offsetting this, however, was a solid ISM services report. For today's release, expectations are for a modest uptick in payrolls to 75k from 73k and for the unemployment rate to rise to 4.3% from 4.2%. Note, given the recent sizeable revisions, the 1-month and 2-month revisions will be of increased importance. Ahead of the release, ING sees mostly downside USD risk given 1) USD is "already expensive against the G10 at current USD swap rate levels" and 2) a soft release could lead to three cuts being priced in by year-end (currently circa 60bps), whilst a hot report could be dismissed as "markets might start to doubt the credibility of data under the new leadership at the BLS". DXY has slipped below yesterday's trough @ 98.08 and is sat around its 50DMA @ 98.05.

EUR: EUR/USD +0.2%; 1.1675

• EUR is currently taking advantage of the broadly weaker USD. Newsflow surrounding the Eurozone is light during today's trade and therefore the dollar is likely to be in the driving seat for EUR/USD. Traders are mindful of French political risk at the start of next week with PM Bayrou set to face a confidence vote on Monday. Betting markets are overwhelmingly expecting him to suffer a defeat. Reports suggest that Macron will refrain from calling fresh legislative elections and instead likely opt to appoint a new PM with the view of obtaining a broader coalition in the legislature by watering down the existing budgetary plans. For markets, the focus will be on the FR/GE spread, which is currently around 77bps. Desks have touted a move towards 90bps (2024 peak) in the event Bayrou is defeated with the risk of a venture to 100bps if fresh elections are called. The follow-through into the EUR may be limited by the looming ECB rate decision and accompanying macro projections. EUR/USD has moved back above its 50DMA @ 1.1664 with clean air until the 1.17 mark.

JPY: USD/JPY -0.2%; 148.13

• USD/JPY has trickled closer towards the 148.00 level to the downside after mixed data including the hotter-than-expected Labour Cash Earnings which showed the fastest pace of increase in seven months, while Real Cash Earnings unexpectedly grew for the first time in seven months. On the trade front, the White House said US President Trump signed an Executive Order officially implementing the US-Japan trade agreement. Subsequently, Japanese PM Ishiba reiterated they will work to minimise the impacts on the economy. Reports have since suggested that an economic package will be compiled this Autumn. For USD/JPY, a soft NFP print could see the pair lose its footing on a 148 handle and head towards yesterday's low @ 147.78. Focus for the upside is on the 200DMA @ 148.79.

GBP: GBP/USD +0.2%; 1.3454

• GBP is firmer vs. the USD but not showing much in the way of outperformance relative to peers despite a better-than-expected outturn for UK retail sales. Commenting on the release, Pantheon Macroeconomics observes that the ONS made major revisions to retail sales today by correcting seasonal factors. As such, H1 retail sales were actually softer than initially assumed. Looking forward, the consultancy notes that "consumers seem to be carrying some momentum into Q3, which could help support GDP growth". For the BoE, following the data and the MPC's appearance before the TSC earlier in the week, Investec now expects that the Bank rate will remain on hold over the remainder of the year at 4.00%. Investec supports its change in call by noting the level of caution from Governor Bailey. As an aside, there will likely be some focus on the UK political agenda with the PM's ethics adviser set to deliver their verdict on the Deputy PM's tax affairs. However, this will likely have little follow-through into financial markets. Cable has eclipsed yesterday's best @ 1.3460 and is now eyeing the 50DMA @ 1.3477.

Antipodeans: AUD/USD +0.5%; 0.6544. NZD/USD +0.5% 0.5876

• Both are firmer vs. the USD and towards the top of the G10 leaderboard in what has been a choppy/directionless week for AUD/USD and NZD/USD. Fresh macro drivers from Australia and New Zealand are lacking and as such, both pairs' fates are likely to be determined by events stateside and broader risk dynamics. AUD/USD has ventured as high as 0.6547 but is yet to test yesterday's best @ 0.6549. NZD/USD has peaked @ 0.5879 with an eye on yesterday's high @ 0.5890.

CAD USD/CAD -0.1%; 1.3799

• CAD is marginally stronger vs. the USD in the run-up to Canadian and US labour market reports, both due at 13:30BST. It is likely that the latter will deliver the greatest source of traction for the pair. Nonetheless, for the Canadian release, expectations are for headline employment growth of 10k vs. a prior contraction of 40.8k and the unemployment rate to tick higher to 7.0% from 6.9%. From a policy perspective, the BoC will use the upcoming labour market data to help guide its future rate path, though it is only one factor, as the Bank remains on hold to assess the impact of US trade policies. Note, in July, rates were left at 2.75% in a unanimous decision with some members noting sufficient support for the economy while others saw a potential need for more. Within the latest BoC minutes, some members expressed concern about the risks of further increases in the unemployment rate. As it stands, markets price a circa 71% chance of a rate cut this month. USD/CAD sits within yesterday's 1.3792-1.3845 range.

05 Sep 2025 - 09:50- ForexData- Source: Newsquawk