US FX WRAP: Dollar trims recent rally on soft NFP and risk-on trade

DXY was only slightly weaker after a softer-than-expected NFP reading as money markets still priced one 25bps rate hike by year end. Employment growth was 29k, shy of the expected 90k, accompanied by 60k negative revisions to the prior reading, and an unemployment rate ticking up to 4.2%. One data point does not mark a trend, is the likely response from the Fed hawks, and with an unemployment rate that stands close to full employment, means the focus has and will remain on the inflation mandate. As such, the initial dovish reaction faded with the reversal higher in US yields allowing the dollar to rebound. Recent dovish Fed speak (Williams, Jefferson, Bowman) and a soft PCE report has seen an October hike look less likely. 2026 Voter Logan sees at least an additional 50bps of tightening to fulfill the Fed's inflation target, effectively reducing the risk management cuts we saw last year amid labour market concerns. DXY hit lows on NFP of 101.668, albeit remains firmer for the third consecutive week, back at May 2025 levels.

G10 FX strength was led by the GBP, AUD, and CHF. Meanwhile, CAD underperformed amid the backdrop of lower energy prices, as next week's labour report is eyed. Oxford Economics expects the Canadian economy to continue struggling to create jobs in the near term as mounting headwinds from new US-Canada tariffs, greater uncertainty from an escalation in the trade war, the ongoing Iran conflict and a shrinking population weigh on hiring. USD/CAD is now hovering around the YTD highs of 1.42629.

EUR saw modest strength, however, French fiscal issues are still at the forefront of minds. In the EU morning, EZ headline inflation Y/Y printed at 3.8% (exp. 3.6%, prev. 3.2%), and Services also rose from the prior. Pertinently, Core HICP moved only a touch higher to 2.2% (prev. 2.1%), which will be welcomed by policymakers, since there is still little evidence of second-round effects. Nonetheless, woes of rising inflation remain – and this data will only further cement calls for another hike later this year.