A four-day week in US markets due to Independence Day will offer plenty to judge whether EUR/USD can attempt a move to 1.20 in the near term. Focus will be on the Senate vote on the Big Beautiful Bill, but the biggest event for FX is Thursday’s US payrolls, a reality check on recent Fed dovish bets. After that, the focus should shift to the 9 July tariff deadline
USD: A Big (Beautiful?) Week
The first half of July could prove pivotal for the FX market, with three events in focus: the Senate vote on the 2One Big Beautiful Bill Act" (OBBBA), which US President Donald Trump wants passed by 4 July, Thursday’s US jobs data, and the expiration of the reciprocal tariff pause on 9 July.
Yesterday, the OBBBA cleared a narrow Senate hurdle, passing the motion to open the debate by a 51-49 margin. Amendment votes begin today, though most are expected to fail. Whether the bill in its current form has enough support to return to the House remains uncertain, with eight GOP Senators reportedly opposed.
Meanwhile, the Congressional Budget Office now estimates the amended bill would add $3.3tr to the debt over the next decade, up from $2.8 trillion for the House version – hardly encouraging news for US fiscal prospects (more on the deficit implications of the OBBBA in this note). That may be contributing to the dollar being on the back foot this morning, with the yen attracting most gains in the G10.
However, the US dollar has not traded actively on the deficit story as of late; after all, an important reaction from Treasuries is needed to spill over into FX. It may well play a role in medium-term considerations that are keeping the dollar weak, but it’s hard to isolate its effect in that context. The near-term dollar story seems to hinge almost entirely on the Federal Reserve, and even the incumbent 9 July tariff deadline appears to be secondary.
Markets are fully pricing in a September cut, and roughly one in five chances of a July cut. This is markedly dovish relative to the latest cautious Fed communication, but given that two FOMC members have openly discussed a July move, markedly disappointing data this week could prompt another round of heavy dollar selling.
The biggest release is undoubtedly Thursday’s jobs report, which directly speaks to the second part of the Fed’s mandate. Payroll’s consensus is 113k, Bloomberg’s whisper number is 104k, and our call is 100k, which probably wouldn’t be enough to trigger heavy betting on a July cut.
Ahead of payrolls, the dollar remains highly sensitive to incoming data, with ISM manufacturing and JOLTS figures due tomorrow and ADP payrolls on Wednesday.
The balance of risks remains tilted to the downside for the dollar, but our calls for only a gradual slowdown in payrolls and an inflation bump in the coming months imply that markets have overshot on dovish pricing. A September cut may be ultimately priced out, and some short-term support for the dollar should emerge. Conversely, a major payrolls disappointment can send DXY below 96.0 even without the OBBBA and tariff factors.
EUR: Waiting on the New Catalyst
In our Thursday note, we examined the prospects of EUR/USD reaching 1.20, highlighting Fed pricing, tariffs, and US deficit concerns as the main drivers for another substantial move higher. As discussed in the USD section, these themes will remain central through the first half of July.
On the euro side, domestic factors have played a more limited role. However, this week’s release of June CPI figures could prompt moves in the short-term EUR/USD swap rate gap – a metric to which EUR/USD has shown heightened sensitivity recently. At the two-year tenor, the spread has narrowed further in favour of the euro. It’s now at -148bp, a +30bp change since the end of May. With markets currently pricing the first cut from the European Central Bank in December, we see risks tilted toward a dovish repricing from here.
German inflation figures are released this morning and can already have some market impact. Expectations are for a modest acceleration from 2.1% to 2.2% in the headline rate. A similar increase is expected for the eurozone-wide print tomorrow (from 1.9% to 2.0%), although core is expected to remain unchanged at 2.3%.
The ECB holds its annual forum in Sintra this week, although we don’t see great risks of market impact given that the central bank has already delivered a pivot in its communication at the latest policy meeting and appears to be in a comfortable position to watch data and tariff developments.
Our baseline remains a return to 1.15-1.16 on the back of a hawkish repricing in Fed expectations once data fails to endorse latest rate cut bets. Even so, the current mix of downside risks for the dollar makes the first half of July one of the best windows for a potential attempt at 1.20.
CAD: US-Canada Trade Talks Resume
USD/CAD is settling back lower after a Friday spike led by President Trump walking away from trade negotiations with Canada. On Sunday, the Canadian Finance Minister, however, announced the withdrawal of the 3% big-tech tax that had prompted the US to walk from trade talks and Trump to threaten new tariffs. The two parties will restart negotiations with the aim of reaching a deal by 21 July.
CAD’s rebound was relatively limited, signalling some lingering concerns on how smoothly negotiations can go from here, and crucially, how deep the agreement can go.
While an ultimate deal can offer some short-term support to the loonie in the crosses, we remain unexcited with the currency’s longer-term prospects as tariffs are still having a material impact on Canadian growth, and markets may be underpricing Bank of Canada rate cut probability.
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