The Dollar's Fate Hangs in the Balance: Will Today's Jobs Report Be the Tipping Point?
The foreign exchange (FX) market is holding its breath, awaiting a pivotal moment that could significantly impact the US dollar's trajectory. But here's where it gets controversial: while some anticipate a substantial downturn, others believe the worst is already priced in. Let's delve into the details and explore the factors at play.
USD: A Crucial Jobs Report Looms Large
The dollar's recent slump wasn't solely due to weak US data, but this week's calendar has certainly fueled the negative sentiment. December's retail sales, released yesterday, failed to meet expectations, remaining flat instead of the predicted 0.4% growth. This translates to a decline in real sales volumes, with the control group slipping 0.1% after November's downward revision. These figures suggest softer consumer spending, potentially leading to downgrades in 4Q25–1Q26 GDP estimates. Most categories experienced declines, except for building materials, which stood out as a rare bright spot.
The labor market also presents a mixed picture. ADP's weekly payrolls were underwhelming, indicating private sector monthly payroll growth of only 20-25k. The Employment Cost Index rose a mere 0.7%, the lowest since 3Q21, with private wage growth slowing to 3.3% year-over-year. The job market dynamics have shifted, with fewer job openings per unemployed worker (less than 0.88) and a subdued quit rate, signaling a transition from excess demand to worker oversupply.
Today's jobs report is the event everyone's watching. A significantly weak outcome could prompt markets to anticipate an April rate cut, potentially pushing the DXY index towards 96.0 in the near term. Our forecast is more optimistic than the consensus, predicting 80k payrolls compared to the expected 65k. The Bloomberg whisper number has plummeted from 50k to 37k following Kevin Hassett's remarks on Monday. We don't foresee substantial downside surprises in 2025 payroll revisions (consensus -825k) or upward surprises in unemployment, which we expect to remain steady at 4.4%.
If our prediction holds, some of the recent macroeconomic negativity surrounding the dollar should dissipate. However, this is the part most people miss: the conditions for a widespread, sustainable USD recovery are still absent. We believe any upward correction in DXY would be short-lived.
EUR: A Return to 1.180 on the Horizon?
The eurozone's impact on the FX market has been minimal lately, with a scarcity of data and ECB President Lagarde's comments failing to raise concerns about euro strength—at least for now.
If EUR/USD surpasses 1.20, possibly due to weak US data, we might hear renewed calls for an FX-driven rate cut from certain ECB members. However, our analysis suggests that 1.25 is the critical level that could trigger a significant downward revision in inflation projections and potentially a rate cut. Scattered comments about euro strength are unlikely to curb the USD-driven EUR/USD upside.
Interestingly, we believe today's payrolls report could push EUR/USD in the opposite direction, favoring a return to the 1.180 level in the near term.
GBP: Battling a Bearish Sentiment
EUR/GBP experienced a brief dip yesterday as markets partially discounted the risk of PM Keir Starmer facing a leadership challenge, following endorsements from Labour Party members. However, this GBP recovery was short-lived, with strong interest in buying EUR/GBP dips, reflecting both political concerns and dovish risks to Bank of England expectations.
Polymarket indicates a 70% chance of Starmer resigning by June 30, and the potential for a less centrist Labour successor poses significant risks for GBP, given the possible fiscal implications. Our outlook remains bullish on EUR/GBP, supported by our prediction of two BoE cuts by June. We consider 0.88 a realistic short-term target.
CEE: Dovish Sentiment Returns Ahead of Key Data
Central and Eastern Europe (CEE) is bracing for a flurry of inflation and GDP data on Thursday and Friday, following a quiet day today. Yesterday, rates markets across the region shifted back to a dovish stance, later reinforced by weak US data. Despite the absence of local catalysts, PLN and HUF rates markets are testing new lows, and the CZK market has rejoined the rate cut pricing after overreacting to higher inflation last week. We anticipate that the upcoming inflation figures will support this narrative, potentially leading to further market pressure on rates.
This situation exerts pressure on CEE currencies, which surrendered some previous gains yesterday. However, we view this as a fine-tuning exercise and don't expect EUR/PLN and EUR/CZK to break out of their current ranges in the coming days. This effectively counterbalances the positive effects of a weak US dollar and narrower interest rate differentials. Today's bond auctions in Poland, the Czech Republic, and Hungary will test the rally in CEE rates assets, with US labor market data potentially setting the next direction.
What's your take on the dollar's prospects? Do you agree that a sustainable recovery is unlikely, or do you see a different path unfolding? Share your thoughts in the comments below!
Disclaimer: This content is for informational purposes only and does not constitute investment advice. It reflects the authors' views and may not represent the official stance of ING. For more details, visit https://think.ing.com/about/content-disclaimer/
