March 07, 2025

“EUR/USD might have moved 4.5% already in the biggest weekly gain in 16 years, but markets are braced for more volatility this afternoon with the release of the February non-farm payrolls report. We could see either a reversal of some of the dollar’s decline or another plunge.”

Tim Hallinan – Trading Director

USD

Trump’s everchanging tariff policy continues to dampen dollar sentiment ahead of today’s critical non-farm payrolls print. As has been discussed throughout the week, the historic drop in the dollar index is the result of both a) policy uncertainty in the US weakening growth and increasing easing bets, and b) a planned fiscal splurge in Europe that triggered the biggest jump in Bund yields since reunification. The European side of the equation has quietened off for now, but Trump reinforced the falling attractiveness of the dollar by once again delaying the 25% tariffs on Canada and Mexico after only two days – how can US growth remain ‘exceptional’ if they do not know what business environment they are operating in from one day to the next? A lot of discussion this week has surrounded the notion of a ‘Trump put’ and at which point a weakening equity market might lead him to change course. The U-turn and shift in focus towards reciprocal tariffs suggests that we might be hitting that level.

Today’s non-farm payrolls report is a big one. 160K is the survey estimate and 120K is the ‘whisper’ number, but a big miss could be hugely damaging for the dollar. It would be the confirmation that investors need to really press on with the idea of a US economic slowdown. A good figure, however, might temper these fears and trim the greenback’s losses from this week.

CAD

The soft reaction of USD/CAD to the latest tariff delay was telling of how predictable it was – the relief had already been priced in through the week. We are not quite back to the 1.42 level that it had settled at in February, but the momentum is in that direction this morning. There is an employment change figure today and it is expected at 20K, and is the final major input before next week’s BoC meeting, where a rate cut is priced at 75%.

GBP

Sterling has flattened off and is consolidating around the 1.29 mark after a nearly 3% rally against a softening dollar. The BoE’s Mann gave a speech yesterday and repeated her reasoning for the baffling U-turn that saw her switch from ardently voting against rate cuts to pushing for a 50bp move, saying she wanted to ‘cut through the noise’ with a message amid the possibility of a ‘non-linear downward adjustment’ to labour demand. There is GDP data next week but today is all about US payrolls. 1.30 is a realistic target here if there is a huge disappointment.

EUR

For now, the market seems to be about done in its rewriting of the European narrative that has driven the 4.5% rally in EUR/USD this week. It is incredible how quickly the story has been upended – the market closed 2024 deeply pessimistic about growth and any possibility of fixing it, while anticipating a new era of dollar strength in Trump’s second administration. Now, US assets are in decline and the EU has thrown open the spending taps to kickstart investment in infrastructure and defence. The ECB decision yesterday became almost a background story, but there was a key adjustment to the language that argued that rates are ‘becoming meaningfully less restrictive’. A Reuters sources story then confirmed what seemed obvious: the April decision will turn into a heated debate as to whether to cut again.

Markets

There was once again a sharp divergence in fortunes between Europe and the US yesterday. While Europe gained, Trump’s chop-and-change trade policy continued to weigh on the US indexes, with the S&P 500 taking a 1.8% hit and the Nasdaq sliding by 2.8%.

Main Economic Events (All Times CET)

2:30pm: US Non-Farm Payrolls
2:30pm: Canadian Employment Change

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