Soft US jobs report weighs on dollar

The US economy added fewer jobs than expected in June according to yesterday’s employment report, prompting an easing of Fed rate hike expectations, a decline in short-dated US bond yields, and a fall in the dollar. The euro and sterling have both gained around a half a cent relative to yesterday morning’s levels, trading at around $1.1450 and $1.3360 respectively this morning. This leaves EURGBP little changed at around £0.8565, close to its lows for the week so far of just under £0.8550. It’s a public holiday in the US today (Independence Day), so markets may be relatively quiet heading into the weekend.

The weaker than expected jobs report contributed to an easing in expectations for Fed rate hikes with about 30bps now priced in by year-end, down from around 36bps before the data. This in turn contributed to a modest decline in US 2-year bond yields, which fell by around 5bps, while 10-year yields were broadly flat. Elsewhere in bond markets, German and UK yields were flat to marginally higher on the day. Meanwhile, in equity markets, European stocks had another positive session, adding more than 1%, while it was a mixed day for US indices with the Nasdaq off almost 1%, the Dow Jones up more than 1%, and the S&P 500 largely unchanged.

The US economy added 57k jobs in June, a good bit shy of the consensus forecast for a gain of circa 115k, while there were also downward revisions to the previous couple of months. Still, jobs growth averaged 111k a month in the second quarter (April-June), accelerating from 73k a month in Q1 and a marked contrast from an average decline in employment of almost 40k a month in the final quarter of 2025). The unemployment rate nudged down to 4.2% last month, from 4.3% in May, though this was mainly due to a (continuing) fall in the labour force participation rate, while the y-o-y growth in hourly earnings ticked up to 3.5% (from 3.4%).

ECB President Lagarde says “we are convinced we made the right decision” in raising interest rates this month, noting that “as early as April, a large majority of the Governing Council was ready to make a decision but we didn’t have all the necessary information.” She also notes that “we are facing an external supply shock that is spreading through the rest of the economy, and we are now seeing its indirect effects”, adding that “we are also paying close attention to the risk of second-round effects, even though they have not materialized so far.” The market has pared back expectations for a further increase in interest rates quite a bit lately with only about 18bps now priced for the end of this year.

It is a quiet end to the week in terms of economic data with a final reading for the June services PMI in the Euro area the only release of note. There a few central bank members due on the wires over the course of the day.