Here’s the shocking truth: the FX market is bracing for a payrolls report that could shake the dollar’s foundations—but is the worst already priced in? And this is the part most people miss: while some disappointment is expected, the real question is whether it’ll be enough to spark a sustainable USD recovery. Let’s dive in.
FX Daily: Payrolls in the Spotlight
Markets have already factored in a softer-than-expected payrolls figure, largely due to Kevin Hassett’s cautionary remarks earlier this week. Our economists predict 80k payrolls and a steady 4.4% unemployment rate, which could ease some of the dollar’s recent struggles. But here’s where it gets controversial: despite this, the conditions for a lasting USD rebound remain elusive. Why? Because the economic landscape is far from supportive.
USD: The Dollar’s Fragile State
The recent dollar selloff wasn’t solely driven by weak U.S. data, but this week’s calendar has only deepened the gloom. December’s retail sales were flat, missing expectations of a 0.4% rise, and the control group dipped 0.1% after November’s downward revision. This points to softer consumer spending and potential downgrades to 4Q25–1Q26 GDP. Think about it: if consumers aren’t spending, what does that mean for the economy’s health?
On the labor front, ADP weekly payrolls were underwhelming, suggesting private sector growth of just 20-25k per month. The Employment Cost Index rose a mere 0.7%, the weakest since 3Q21, with private wage growth slowing to 3.3% YoY. With fewer job openings per unemployed worker and a subdued quit rate, the labor market has shifted from worker scarcity to oversupply. Is this the new normal, or just a temporary blip?
Today’s jobs report is a make-or-break moment for the FX market. A significantly weak print could push markets to price in an April rate cut, potentially sending the DXY toward 96.0. Our forecast of 80k payrolls is more optimistic than the consensus (65k) and the Bloomberg whisper number, which has plummeted to 37k post-Hassett. We don’t expect major surprises in 2025 payroll revisions or unemployment, which we see holding at 4.4%.
If our prediction holds, some of the macro negativity weighing on the dollar could lift. However, a broad-based USD recovery seems unlikely, and any upward correction in DXY may be short-lived. What do you think? Is the dollar doomed, or is there hope for a turnaround?
EUR: The Euro’s Quiet Strength
The eurozone’s impact on the FX market has been minimal lately, with scarce data and ECB President Lagarde offering little to suggest euro strength is a concern—yet. If EUR/USD climbs past 1.20 on weak U.S. data, we might hear renewed calls for an FX-driven rate cut. However, our view is that 1.25 is the threshold for a material downward revision in inflation projections and potential rate action. Scattered comments on euro strength are unlikely to curb USD-driven EUR/USD gains.
Today, we believe payrolls could push EUR/USD lower, favoring a return to the 1.180 level in the near term. But is this just a temporary dip, or the start of a bigger trend?
GBP: Battling the Bearish Tide
EUR/GBP dipped yesterday as markets partially priced out risks of a leadership challenge to PM Keir Starmer following Labour Party endorsements. However, the GBP recovery was short-lived, with strong interest in buying EUR/GBP dips—a reflection of political uncertainty and dovish Bank of England expectations.
Polymarket puts the odds of Starmer resigning by June 30 at 70%, and concerns about a less centrist Labour successor pose fiscal risks for GBP. Our bullish stance on EUR/GBP remains, backed by our call for two BoE cuts by June. A short-term target of 0.88 feels increasingly realistic. Are we underestimating the pound’s resilience, or is this the beginning of a steeper decline?
CEE: Dovish Sentiment Returns
The region faces one last quiet day before Thursday and Friday’s inflation and GDP data deluge. Yesterday, rates markets shifted back to dovish mode, reinforced by weak U.S. data. Despite no local catalysts, PLN and HUF rates are testing new lows, and the CZK market has resumed pricing in rate cuts after overreacting to higher inflation last week. We expect upcoming inflation figures to support this narrative, potentially pushing rates lower and pressuring CEE FX, which corrected previous gains yesterday.
This remains a fine-tuning exercise, and we don’t foresee EUR/PLN or EUR/CZK breaking current ranges soon. This offsets the positive effects of a weak USD and narrower interest rate differentials. Today’s bond auctions in Poland, the Czech Republic, and Hungary will test CEE rates assets, with U.S. labor data potentially setting the next direction. Is this the calm before the storm, or just another day in the markets?
Final Thought: As we navigate these uncertain times, one thing is clear: the FX market is at a crossroads. Will payrolls be the catalyst for change, or just another data point in the noise? Let us know your thoughts in the comments—we’d love to hear your take!
