Markets Brace for US Jobs Data and Policy Shifts.

• USD stability ahead of jobs data: The dollar steadied as markets absorbed tariff shocks and reconsidered US-China optimism. Treasury reaffirmed a strong dollar policy.
• Key risk from payroll revisions: Expected job growth slowdown and potential major revisions could highlight issues in labor market data.
• Dovish Fed outlook could weigh on USD: Markets anticipate 43bp in rate cuts by year-end, with downside risks for the dollar.
• ECB’s neutral rate signal: A hawkish r-star estimate could support the euro, with EUR/USD eyeing 1.044 highs.
• BoE’s dovish tone weakens GBP: Rate cut expectations pressured Sterling, while mixed Eurozone data left EUR sentiment uncertain.

USD: Will Payroll Revisions Shake Up the Dollar?

The dollar’s recent downward momentum has steadied ahead of today’s US jobs report. Markets have largely absorbed last weekend’s tariff shock, and optimism over a US-China trade deal is fading. With China’s retaliatory tariffs set to take effect on Monday, chances of a de-escalation are slim. Meanwhile, Treasury Secretary Scott Bessent reaffirmed the US’s strong dollar policy, providing some support for the greenback.

The key market driver today will be the January payroll report. Consensus expects a slowdown from 256k to 175k, but our estimate is closer to 160k. Annual benchmark revisions could be significant, as last year’s provisional data suggested the Bureau of Labor Statistics had overestimated job growth by nearly a third. This raises concerns about the accuracy of current models, making this release particularly impactful.

Despite potential support from deteriorating US-China sentiment, we remain bearish on the dollar. Markets are pricing in 43 basis points of rate cuts by year-end, and softer economic data could prompt a dovish repricing. A drop to 107.0 in the DXY index seems justified.

Canada also releases January jobs data today, with hiring expected to slow significantly after December’s strong numbers. Unemployment is projected to rise to 6.8%. While this may not immediately push the Bank of Canada toward further rate cuts, future moves could be driven by US tariff developments. For now, USD/CAD is likely to stay below 1.44.

EUR: Will the ECB Signal a More Hawkish Neutral Rate?

The European Central Bank (ECB) is set to release its latest staff projections on the neutral rate today. ECB President Christine Lagarde recently stated that r-star—the theoretical neutral interest rate—should not be treated as a policy target, while Governing Council member Olli Rehn echoed this sentiment, emphasizing flexibility in decision-making.

With immediate rate cuts not under discussion, market focus is on the terminal rate. While US tariffs on the EU remain an uncertainty, today’s ECB report will be the main driver of euro sentiment. Given Rehn’s comments and the model-based nature of r-star estimates—likely incorporating higher inflation than before—our view is that the report will present a relatively high neutral rate, signaling a hawkish stance.

If US payroll data disappoints, this could fuel further gains in EUR/USD, with a potential retest of Wednesday’s 1.044 highs.

GBP: Sterling Struggles After BoE’s Dovish Pivot

At the time of writing, GBP/EUR traded around €1.1954, down 0.5% from Thursday’s opening. The Pound slid against most peers after the Bank of England’s (BoE) latest policy decision.

While the widely expected rate cut from 4.75% to 4.5% was priced in, the dovish voting split and forward guidance triggered a rise in expectations for further easing, weakening Sterling during Thursday’s session.

Meanwhile, the euro was mixed following conflicting Eurozone data. Germany’s December factory orders surged from -5.2% to 6.9%, exceeding forecasts. However, retail sales missed expectations, posting a -0.2% decline instead of the anticipated -0.1%.

GBP/USD traded near 1.2420 in Friday’s European session ahead of the US Nonfarm Payrolls (NFP) report at 13:30 GMT. The US Dollar Index (DXY) ticked up to 107.80 as investors awaited job market data that could shape Federal Reserve policy.

On Thursday, Dallas Fed President Lorie Logan reinforced a hawkish stance, advocating for keeping rates steady “for quite some time” unless labor market conditions deteriorate. Fed Chair Jerome Powell echoed this last week, signaling that any policy adjustments would require clear evidence of inflation cooling or labor market weakening.