• US labor market weakness risks accelerating the dollar’s decline.

• Eurozone inflation seen stabilizing at the ECB’s 2% target.

• France’s political turmoil remains country-specific and not systemic.

US Jobs Takes the Spotlight

USD struggled this week near the lower end of August’s narrow range. US protectionist trade policy, political interference with the Fed’s independence, and a dovish Fed can further weigh on USD. US August non-farm payrolls (Friday) will help determine whether markets start to price-in a 50bps Fed funds rate cut at the September 16-17 FOMC meeting or stick with the current 25bps rate cut bet.

US payroll gains in August are expected to be soft at 75k vs. 73k in July. Private sector payrolls, a better indication of the underlying momentum in the labor market, is seen at 75k vs. 83k in July. Worrisomely, downside risks to US employment are rising. The Conference Board Consumer Confidence labor differential index (jobs plentiful minus jobs hard to get) dropped 1.3 points to 9.7 in August, the lowest since February 2021 and indicative of a rapid rise in the unemployment rate.

Interestingly, Fed Governor Christopher Waller estimates that, after accounting for the annual “benchmark” revisions to 2025 (the preliminary estimate is due September 9), private-sector employment actually shrank, on average, in May, June, and July instead of posting gains of 52k.

Nonetheless, recent US economic data argues against a jumbo Fed funds rate cut in September. Real final sales to private domestic purchasers rose at an annualized quarterly rate of 1.9% in Q2 (same as in Q1) vs. advance estimate of 1.2% and real personal spending increased 0.3% m/m in July vs. 0.1% in June. Moreover, PCE non-housing services inflation quickened in July to a four-month high at 3.3% y/y vs. 3.1% in June, suggesting progress towards the Fed’s 2% inflation goal is stalling.

The August ISM indexes for manufacturing (Tuesday) and services (Thursday) will also be closely watched. The July prints suggested the US economy is teetering on the edge of stagflation, a backdrop that is USD negative. Services activity was near stall speed and manufacturing activity contracted at its fastest pace since October 2024. In parallel, the price index for both the services and manufacturing sectors pointed to upside risk to inflation.

ECB In a Good Place

Eurozone headline CPI is projected at 2.0% y/y in August vs. 2.0% in July while core CPI is expected at 2.2% y/y vs. 2.3% in July (Tuesday). Inflation is stabilizing at the ECB’s 2% medium-term target. Bottom line: EUR/USD uptrend is intact as the ECB is in a good place to keep rates on hold while the Fed is about to resume easing.

Political uncertainty in France is a headwind for EUR. The French government is on the verge of collapse. Prime Minister François Bayrou has called a confidence vote on September 8 to secure backing for his fiscal policy that aims to tackle France’s fiscal woes. Bayrou is targeting €44 billion in spending cuts for 2026, freeze pensions/benefits/tax brackets, cap spending, and scarp two public holidays.

Opposition parties from across the political spectrum have vowed to support toppling the government. Bayrou will meet opposition leaders on Monday to try to rally support and keep his administration afloat.

10-year French OAT- German Bund yield spreads widened to as much as 82bps this week, the highest since January. If Bayrou loses the upcoming vote of confidence, President Emmanuel Macron can either appoint a new prime minister that has the support of a fragmented parliament or call snap parliamentary elections. The political turmoil in France can further widen OAT-Bund spreads but it’s unlikely to weigh meaningfully on EUR as the situation remains country-specific and not systemic.

BOE Faces Growth-Inflation Dilemma

UK retail sales data is the focus (Friday). Total retail sales volumes are expected at 0.3% m/m vs. 0.6% in June and excluding auto fuel, retail sales volumes are seen at 0.4% m/m vs. 0.9% in June. The Bank of England (BOE) forecasts modest consumption growth of 0.2% q/q in Q3 supported by positive real wage growth. But elevated household savings means spending activity will likely remain subdued.

Unfortunately, the BOE has limited room to dial-up easing to support growth because UK services CPI inflation is stubbornly high at 5.0% y/y. Bottom line: elevated UK underlying inflation and a sluggish growth outlook spell trouble for GBP, especially versus EUR.

Riksbank Easing Cycle Running Out of Steam

Sweden’s policy relevant CPIF is expected to rise to a 19-month high at 3.2% y/y vs. 3.0% in July while CPIF ex-energy is projected at 3.0% y/y vs. 3.2% in July (Thursday). If so, both headline and core CPIF would be tracking well above the Riksbank’s August forecast of 2.7%.

Sweden interest rate expectations have room to adjust higher in favor of SEK. The Riksbank has penciled-in a policy rate at 1.92% by Q4 2025 before bottoming at 1.88% by Q1 2026. The swaps market price-in one 25bps cut and the policy rate to settle at 1.75% over the next 12 months.

Swiss Inflation, No Big Deal

Switzerland headline CPI is expected at 0.2% y/y vs. 0.2% in July while core CPI is projected at 0.8% y/y vs. 0.8% in July (Thursday). The Swiss National Bank (SNB) forecasts headline CPI inflation to average 0.1% in Q3 before gradually picking-up and stabilizing at 0.7% by Q2 2027.

At the last June 19 meeting, the SNB cut the policy rate 25bps to 0%. This week, SNB Vice President Antoine Martin downplayed the case for additional rate cuts noting that “The bar for introducing negative rates is higher than for a reduction in interest rates in positive territory.” Nevertheless, the benign Swiss inflation backdrop and 39% tariff on Swiss goods exports to the US, the highest for any advanced economy, mean a negative policy rate cannot be ruled out.

The Swiss economy is one of the most export dependent countries with goods exports accounting for roughly 60% of GDP and goods exports to the US representing about 18% of total merchandise exports. The swaps market price-in 50% probability of 25bps cut in the next 12 months. Regardless, the drag to CHF from the likelihood of negative rates is outweighed by the currency’s safe haven status.

Japan: Mo’ Money, No Problem

Japan July cash earnings is the data highlight (Thursday). Nominal cash earnings are expected at 3.0% y/y vs. 3.1% in June. The less volatile scheduled pay growth for full-time workers is forecast at 2.5% y/y vs. 2.3% in June. Overall, Japan wage growth is not a source of significant inflation pressures given annual total factor productivity growth of about 0.7%.

Bottom line: the Bank of Japan is unlikely to raise the policy rate by more than is currently priced-in, limiting JPY upside. The swaps market imply 70% odds of a 25bps rate hike by year-end and a total of 75bps of rate increases to 1.25% over the next three years. We expect USD/JPY to remain within a wide 142.00-150.00 range over the next few months.

Australia: GDP will Draw Focus, But Not Moves

Australia Q2 real GDP (Tuesday) is projected to rise 0.5% q/q vs. 0.2% in Q1 fueled by consumer spending. Regardless, Australia’s August job print, due September 18, will be a bigger driver of RBA rate expectations.

The RBA flagged that the pace of decline in the cash rate will largely be driven by labor market conditions. In the meantime, the July labor force report showed solid full-time job gains and argues for a gradual easing path. Bottom line: cash rate futures should continue to imply about 50bps of easing in the next 12 months, anchoring AUD/USD within its multi-month 0.6400-0.6600 range.

Canada: Jobs Report to Drive BOC Rate Cut Bets

Canada real GDP dropped at an annualized quarterly rate of -1.6% vs. 2.2% in Q1 due to a sharp contraction in exports after tariffs were imposed. The result was largely in line with the Bank of Canada’s (BOC) projection of -1.5%. Encouragingly, higher household spending tempered the decline in economic activity.

However, the softening in the labor market suggests the pick-up in consumer expenditure is not sustainable. On Friday, the economy is expected to add just 10k jobs in August vs. -40.8k in July and the unemployment rate is forecast at 7.0% vs. 6.9% in July.

Bottom line: there is scope for the swaps curve to price-in a greater probability of a 50bps BOC policy rate cut by year-end to 2.25%. If so, CAD underperformance will likely be clearer versus AUD than USD. RBA is on track to ease more cautiously than the Fed and global economic activity is resilient.