This week set up a genuine tug of war between a resurgent dollar and a struggling euro, and this afternoon's US jobs report has just thrown a major curveball into that story.
The dollar's sharp rise
The US dollar strengthened sharply this week, but not entirely for the reason you might expect. Yes, strong American spending and hiring data had kept the case for another Federal Reserve rate rise alive. But a lot of this week's move was actually about Europe's problems rather than America's strengths. Concerns over French government debt grew so much that the gap between French and German borrowing costs widened to its highest level since the eurozone debt crisis in 2012. When investors get nervous about European government debt, money tends to flow toward the dollar as a safe place to park it.
EUR/USD under real pressure
That combination hit the euro hard. Even though eurozone inflation came in much hotter than expected on Friday morning, jumping to 3.8% from 3.2%, the euro struggled to benefit. Most of that inflation is being driven by energy costs rather than genuine economic strength, and the growing worry over French debt overshadowed everything else.
GBP/USD at fresh lows, GBP/EUR at fresh highs
Sterling had a genuinely unusual week, moving in opposite directions against its two main trading partners. Against the dollar, GBP/USD pushed down to levels not seen in several months, close to the 1.32 mark, swept up in broader dollar strength. Against the euro, it was a completely different picture, with GBP/EUR climbing to its best level in two months, reclaiming 1.17 for the first time since early August, helped by high UK government bond yields and growing hopes of closer UK and EU trade ties.
The US jobs report changes the picture
This afternoon's figures landed well below expectations, and by some distance. US employers added just 29,000 jobs in September, far short of the 90,000 forecast, while unemployment rose to 4.2%. The previous two months were also revised down by a combined 60,000, and wage growth slowed sharply too, up just 0.1% on the month against 0.3% expected.
This is a genuinely soft report, and it lands straight after Wednesday's cooler inflation data, giving the Federal Reserve less reason to rush into another rate rise. Given how much of this week's dollar strength was built on rising rate expectations, a miss of this size has real potential to take some of that strength back out of the market as trading continues into the afternoon.
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