No Jobs, Just Services

October 03, 2025

Elias Haddad

The September ISM Services report runs the show today. USD retraced some of yesterday’s gains, global equity markets are up, and bond markets are steady.

French PM ramps-up talks as budget deadline looms. France’s fiscal/political instability is a headwind, not a drag on EUR.

BOJ Governor Ueda signals low urgency for rate hikes. JPY underperforms.

USD is trading heavy near the middle of its August-September range. Narrowing US-G6 rate differentials limit the scope for USD relief rallies. With the nonfarm payrolls data sidelined by the US government shutdown, the September ISM services report takes center stage today (3:00pm London, 10:00am New York). The headline index is projected at 51.7 vs. 52.0 in August.

We anticipate the Fed to turn more dovish by the time of the December FOMC meeting because restrictive monetary policy can worsen the already fragile employment backdrop and upside risks to inflation are not materializing. Bottom line: USD downtrend is intact.

JAPAN

JPY is underperforming. Bank of Japan (BOJ) Governor Kazuo Ueda stuck to the bank’s long-held guidance of raising rates if the outlook for economic activity and prices will be realized. Ueda added he does not think the possibility of the BOJ falling behind the curve on inflation is high, suggesting he sees little urgency to resume normalizing rates. Our base case is for the BOJ to raise rates at the next October 29-30 meeting which bodes well for JPY. The swaps market price-in 56% odds of a rate increase at that meeting.

EUROZONE

EUR/USD recovered to 1.1740 from yesterday’s low near 1.1685. French Prime Minister Sebastien Lecornu will meet with lawmakers today for crunch talks ahead of the October 13 budget deadline. To rally support from opposition parties, Lecornu ruled out using a constitutional clause to force the budget through. However, France’s political gridlock makes reaching a fiscal compromise nearly impossible to achieve. The National Assembly is deeply divided, with no single party holding a clear majority. Bottom line: the political and fiscal turmoil in France can further widen French OAT-German Bund yield spreads but it’s unlikely to meaningfully weigh on EUR as the situation remains country-specific and not systemic.

In Q2, the EUR share of global FX reserves rose to 21.13% vs. 20.00% in Q1. However, by holding exchange rates constant, its share would have fallen to 19.96% in Q2. A major obstacle to the euro gaining greater prominence in global central bank FX reserves is the limited supply of highly rated European assets.

Indeed, ECB Governing Council Member Francois Villeroy highlights that the total amount of European safe assets outstanding (almost $10 trillion) accounts to barely 33% of US Treasuries (over $30 trillion). Villeroy proposes three ways to increase the supply of European safe assets that could collectively add up to €8.5 trillion: (i) Merging existing supranational debt, (ii) Transforming existing national sovereign debt into genuine European sovereign debt, (iii) Creating and rolling over new supranational debt.

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