Rates, risk and the rebound

Market overview

FX markets are trading with a firmer risk tone, although price action remains shaped by a familiar mix of resilient US data, shifting rate expectations and political uncertainty. The dollar is holding a broadly stronger bias, but risk-sensitive currencies have also found support as stronger US activity data helped lift equity markets and improve wider sentiment.

The Chicago PMI rose to 56.7, ahead of the 55.7 expected, signalling a firmer pace of expansion. Job openings also surprised to the upside, with the JOLTS report printing at 7.59 million. That has raised the stakes ahead of Thursday’s earlier-than-usual non-farm payrolls release, although tonight’s ADP employment report will be watched closely for a clearer steer.

AUD/USD climbed around 0.5%, rebounding firmly from its 200-day moving average, while NZD/USD held support near 0.5700. In Asia, USD/JPY extended its advance to fresh 40-year highs, keeping intervention risk firmly on the radar.

USD: labour data takes centre stage

The dollar’s overnight strength was underpinned by better US activity and labour market data, with investors reassessing the resilience of the economy ahead of a key run of jobs figures.

EUR/USD and GBP/USD both edged lower as the greenback gained ground, although USD/CAD softened ahead of the Canada Day holiday. The focus now turns to ADP employment data, followed by non-farm payrolls, which could shape near-term expectations for the Federal Reserve.

A stronger labour market reading would likely provide the dollar with further support. However, the Fed’s policy response remains more closely tied to inflation trends, meaning jobs data may need to surprise meaningfully to trigger a more decisive repricing.

GBP: sterling holds its ground

Sterling continues to show resilience, despite ongoing political uncertainty. The pound has made a more convincing break above 1.16 against the euro, a level that has capped gains since the summer of 2025.

Markets appear comfortable with the current political backdrop, suggesting much of the uncertainty is already priced in. Investors also seem to be treating Andy Burnham as a likely future prime minister, with a form of political “honeymoon” already reflected in sterling’s performance. Recent history suggests the pound can perform well when markets begin to coalesce around an incoming leader.

Risks remain further out. Political and fiscal scrutiny may return towards year-end as markets refocus on domestic issues and the UK’s fragile public finances. For now, GBP/USD continues to find support near 1.3200. Initial resistance sits around 1.3260, followed by 1.3340. A stronger US jobs print could push the pair back towards 1.3200, but a sustained break lower looks less likely at this stage.

EUR: softer inflation challenges ECB pricing

The euro is facing renewed pressure after weaker-than-expected inflation data from France and Germany reduced the urgency for further European Central Bank tightening.

German inflation fell by 0.3% on the month, below expectations for a flat reading, while the annual rate eased from 2.6% to 2.3%. French CPI also declined by 0.3% on the month, taking the annual rate down to 1.8%, well below the 2.1% expected.

Markets had entered the releases pricing in another ECB rate rise by year-end. That pricing may now come under further pressure if investors conclude that disinflationary forces are strong enough to remove the need for additional tightening. This could leave the euro vulnerable against currencies where rate expectations are either stable or moving higher.

ECB President Christine Lagarde remains cautious, noting in Sintra that the central bank can make “measured adjustments” to rates depending on the shocks it faces. That stance should provide the euro with some support. Even so, if markets increasingly view the recent inflation impulse as temporary, expectations for further rate rises may continue to fade, weighing on the single currency.

Looking ahead

• ADP employment data will offer the next key signal for US labour market momentum.

• Thursday’s non-farm payrolls report remains the main event for dollar direction.

• USD/JPY intervention risk is likely to stay elevated after the move to fresh 40-year highs.

• Softer eurozone inflation could see markets pare back expectations for further ECB tightening.

• GBP/USD support around 1.3200 remains important, with 1.3260 and 1.3340 the key resistance levels to watch.