Cracks in the US Jobs Market and Cooling Inflation Shift the Mood.
Summary
US hiring slowed sharply in June, with payrolls well below forecast and the previous two months revised down; markets responded by pushing back expectations of a Federal Reserve rate rise
Eurozone inflation fell more than expected in June to its lowest level since February, as the energy prices that drove the recent surge began to unwind
Oil has returned to around its pre-war level following the US-Iran peace deal, easing the inflationary pressure that had defined the first half of the year
The Labour leadership contest moves forward this week with nominations opening on Thursday; Andy Burnham is the only declared candidate, raising the prospect of an orderly transition
The tone in currency markets has shifted. For months the dominant theme was rising inflation and central banks turning hawkish in response, culminating in rate rises from the European Central Bank and a firm signal from the Federal Reserve that its next move could be upward. That picture is now changing quickly. Friday's US jobs report revealed a labour market cooling faster than expected, eurozone inflation has fallen back sharply, and the collapse in oil prices following last month's peace agreement is steadily working its way through the system. Markets that were positioning for tighter policy only weeks ago are beginning to reconsider.
The dollar softened after a notably weak US employment report. Payrolls rose by far less than forecast in June, the smallest increase in four months, and downward revisions to April and May stripped a further chunk from the earlier picture of strength. The unemployment rate did edge lower, but for the wrong reasons, driven by a sharp fall in labour force participation to its lowest level since early 2021 rather than by fresh hiring. Wage growth remained contained. Taken together, the report challenged the narrative of a resilient jobs market that had underpinned the Fed's hawkish stance, and traders quickly pared back the likelihood of a rate rise at this month's meeting. Attention this week turns to Wednesday's release of the minutes from the June meeting, which will be examined for how seriously policymakers were considering a hike before the latest data landed.
Sterling has steadied as the political picture in Westminster moves towards resolution. Keir Starmer's resignation last month triggered a Labour leadership contest, and with nominations opening on Thursday, Andy Burnham stands as the only declared candidate. Should no rival emerge with sufficient support, the contest could conclude quickly and hand him the leadership without a prolonged battle. Markets have taken some comfort from the prospect of an orderly transition, having initially feared a drawn-out contest and a sharp shift in fiscal policy. The relief is conditional. Burnham has long argued for a more interventionist approach than the current leadership, and investors will scrutinise both his economic programme and his choice of chancellor for any sign that the fiscal discipline associated with Rachel Reeves is being loosened. For now, the pound is drawing support from reduced political uncertainty rather than economic strength.
The euro held broadly firm even as the case for further ECB tightening weakened. Eurozone inflation fell more than expected in June, dropping back to its lowest level since February as energy price pressures eased markedly. Core inflation also moderated. Having raised rates only last month, the ECB now faces a rapidly shifting backdrop, with the sustained fall in oil undermining the argument for the additional hikes that markets had begun to anticipate. The single currency has been resilient nonetheless, supported by a softer dollar and by an economy that, while subdued, has so far avoided the sharper slowdown some had feared. The direction of energy prices over the coming weeks will be central to how the ECB proceeds.
Events to Watch This Week:
Monday 6 July: Eurozone retail sales (May); US ISM Services PMI (June)
Wednesday 8 July: Minutes of the Federal Reserve's June meeting
Wednesday's Federal Reserve minutes are the standout release in an otherwise quieter week, offering insight into the Committee's thinking at a moment when the economic backdrop is shifting beneath it. With the June jobs data now pointing to a cooling labour market, the minutes will help shape expectations for the Fed's next move. Speak to the Orbis dealing team to ensure your upcoming transfers are protected.
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