Disappointing American Employment, the Dollar Declines

The macro point

For several weeks, the dollar benefited from the firmness displayed by the Fed. On June 17, Kevin Warsh maintained rates at 3.50-3.75%, removed the accommodative bias, and presented projections ("dot plot") leaning more towards a rise than a fall in 2026. This position was notably based on a labor market that remained solid. The June report, published on July 2, nuances this finding.

57,000 jobs created, compared to a consensus around 110,000 to 170,000. It's nearly half as much as hoped for, after the +172,000 in May. The unemployment rate falls to 4.2%, but mainly because individuals are leaving the labor force rather than hiring accelerating. The market reacted quickly: the dollar retreated across all pairs, and the EUR/USD climbed back above 1.14.

However, caution is advised, as one isolated month does not make a trend. It's a slowdown in hiring, not a rise in unemployment - the distinction matters. Employment figures are volatile and often revised (May was indeed revised upwards). Moreover, Kevin Warsh wants to be data-dependent and attentive to inflation, which remains high: 4.2% year-on-year in May for the general index, 2.9% for the core, with wages around +3.5%. It is therefore not certain that a single disappointing figure is enough to change his stance. The FOMC minutes, published on July 8, will allow for judgment.

On the European side, a shortcut should be avoided: the ECB has not eased its policy. On the contrary, it raised its rates on June 11, setting the deposit rate at 2.25% - the first hike by a major G7 central bank since the Iranian conflict. What has changed is the tone. Eurozone inflation fell to 2.8% in June (flash estimate of July 1), compared to 3.2% in May, and the core to 2.4% - both figures below expectations. In Sintra, Christine Lagarde stated that the risks to inflation and growth have decreased. The market no longer anticipates more than one additional hike, where it recently expected two. The ECB therefore remains in a tightening stance, but its appetite for new hikes is diminishing.

The decline of the greenback appears real but remains fragile. It will depend heavily on the FOMC minutes (on the 8th) and US inflation in June (on the 14th). If the employment slowdown is confirmed, the EUR/USD could head towards 1.16-1.17 this summer; if the minutes remain firm and inflation close to 4%, a return towards 1.13 is just as plausible.

Technical point

After a low of 1.1378 on July 1, the EUR/USD climbed to 1.1455 on the 3rd, gaining about 0.5% over the week and moving away from its one-year lows. It is mainly the revision of the Fed's policy expectations that explains this movement.

The Swiss franc remains firm, in its usual role as a safe haven and supported by a cautious SNB. The pair trades without marked direction, around 0.92. A resurgence of nervousness - geopolitical or tougher minutes - would mechanically benefit the franc.

The yen remains structurally weak despite the Bank of Japan's slow normalization. A softer dollar offers it a breath of fresh air at the margin, but the EUR/JPY remains near its peaks. No reversal in sight as long as the real rate differential remains as unfavorable to the yen.

The loonie is pegged to oil, which stagnates around $72 per barrel (Brent), the lowest since late February. Without new impetus on crude, the EUR/CAD remains steady in its range, with a slight bearish bias if the CAD benefits from a weaker US dollar.

The pound holds firm against a euro weakened by its own disinflation. The pair remains low, trailing a Bank of England that has yet to decide on the next steps.

The supports and resistances shown below indicate the lows and highs within which the rates should evolve during the week.

Announcements to follow

A calmer week on the major events front: no Fed meeting (next decision on July 28-29), nor the ECB. The event not to be missed is the FOMC minutes on Wednesday, July 8. The market will look there to gauge the solidity of the "possible hike" pivot in light of the employment shock. The ECB minutes and Chinese inflation will complete the picture before US inflation for June expected on July 14.

The information provided in this publication is communicated to you for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not under any circumstances be considered as an incitement to engage in any investment.