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As we approach the all-important US nonfarm payrolls report this Friday, the market finds itself caught in a strange balance: data that’s “not bad enough” to trigger Fed easing, but also “not good enough” to justify a sustainable bullish dollar trend. This week’s JOLTS report was just the latest example job openings unexpectedly climbed to 7.39 million, helping the US dollar claw back some of its early-week losses and pushing the DXY higher toward 99.40.
NFP USA
But here’s the catch: despite the bounce in USD, the market isn’t buying the idea of a new leg higher. The underlying momentum still reflects growing doubt about the sustainability of US economic outperformance a theme I’ve been flagging for months. Yields are holding firm, but that’s masking cracks beneath the surface: wage growth is slowing, the quit rate dipped again, and policy uncertainty is back in full swing with Trump now doubling tariffs on steel and aluminium, effective immediately. This isn’t 2018, but echoes of the trade war are back and they’re starting to weigh on sentiment.
DXY H4 Chart
Even with all this, markets remain stubbornly cautious. Rate expectations haven’t shifted much. The probability of a Fed cut by July sits below 10%, while September pricing implies a cautious 20bps of easing. In short: unless NFP delivers a major downside surprise, the Fed stays on hold, and the dollar holds firm. But beyond this short-term stabilization, the broader macro landscape remains fragile and it’s exactly that fragility that continues to fuel positioning on the short-USD side of the book.
FEDWatch
Australia: Weak GDP, Stronger Aussie?
Let’s talk about the AUD. Q1 GDP came in at just 0.2%, missing both RBA forecasts and consensus, and marking one of the weakest quarters since the post-COVID rebound began. Yet AUD/USD tried to rally off the print a move that confused many traders, and rightfully so. Was this a case of markets front-running RBA cuts to support growth? Maybe. But more likely it was just another example of FX flows disconnected from fundamentals in the short term. The rally didn’t stick, and AUD/USD remains locked below the 0.6500 resistance zone. JPM desks moved up their forecast for the RBA’s next cut from August to July, and money markets are already pricing two more 25bp moves by August. From a flow perspective, downside seems capped for now, but meaningful upside requires a weak USD (DXY) or a sudden rebound in Australian data neither of which looks imminent.
Swiss Deflation Risks Re-Emerge
In Europe, the inflation narrative is diverging and nowhere is that clearer than in Switzerland. CPI fell to -0.1% in May, pushing the country back into outright deflation for the first time since 2021. That’s a red flag. Energy and rent were the main drags, but the bigger story here is what this means for the SNB. Markets are now pricing a high chance of another 25bp cut this month, with some desks even talking about a return to negative rates later this year. Board members are trying to downplay the deflation print but if the franc stays firm and inflation keeps undershooting, they’ll have no choice but to act. FX intervention is one option, but geopolitical sensitivity (especially with Washington’s focus on currency manipulation) limits their room to manoeuvre. For now, EUR/CHF remains anchored in a tight 0.93–0.94 range, but any push toward the lower bound may offer a tactical long entry for those betting on an aggressive SNB pivot.
Eurozone: Soft Inflation Meets Fiscal Hopes
Across the euro area, May’s inflation data disappointed headline and core slowed to 1.9% and 2.3%, with services inflation falling sharply from 4% to 3.2%. Normally that would spark renewed selling pressure on the euro, but that hasn’t really played out. The reason? Markets are starting to shift their focus from monetary policy to fiscal support. Germany is reportedly preparing a €46 billion package of corporate tax breaks alongside new infrastructure and defence spending. That may not offset weaker exports or trade disruptions, but it helps cushion the blow. ECB is still expected to cut rates by 25bps this week, and we think another cut by year-end is a strong possibility. But with nearly two cuts already priced in, further downside for the euro is likely to be limited unless growth slows materially or the US surprises to the upside.
JPM’s traders still see medium-term upside in EUR/USD especially if US data underwhelms and many are positioning via short-dated options and cash longs around 1.0850–1.09. However, if we see another strong job print Friday, expect these positions to get trimmed aggressively.
Canada: Caught in the Crossfire
USD/CAD has been quietly consolidating ahead of today’s BoC rate decision. April’s inflation beat, but Q1 GDP came in softer, and the trade backdrop isn’t helping. The consensus is for a hold, but the tone will be key a hawkish hold could push CAD higher, while even a hint at dovishness (or an outright surprise cut) could take USD/CAD 100 pips higher in minutes. The bar for rate cuts is still high, but with the US imposing new tariffs and Canada facing softening domestic growth, the BoC will need to strike a delicate balance.
Sterling Holding Up Amid Political Noise
The pound has been one of the few G10 currencies holding up against the USD, thanks in part to the UK being exempt from Trump’s new metal tariffs and relative BoE hawkishness. Bailey’s latest comments suggest that while rate cuts are coming, the BoE won’t hesitate to act if inflation undershoots. Reeves’ £15bn infrastructure proposal hasn’t made waves yet, but it could gain more attention as we approach next week’s fiscal review. For now, flows remain supportive, and EUR/GBP is anchored near 0.8410, with strong resistance around 0.8460.
This week is a prelude to a potential volatility spike. The calm before the storm, if you will.
The dollar’s bounce is real, but it’s shallow under the surface, trade uncertainty, political risk, and softening inflation dynamics are keeping rate cut expectations alive. Central banks are now forced to dance between easing too soon and waiting too long. In this climate, FX is being driven less by spreads and more by positioning, policy surprises, and geopolitics.
Stay light, stay reactive, and don’t trust the price action too much especially heading into NFP. If the data disappoints, dollar shorts will be rewarded. But if it surprises to the upside? We could see a nasty squeeze higher in USD across the board.
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