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Yesterday, the dollar took a bit of a tumble following Fed Chair Powell's remarks in Sintra. As anticipated, he struck a relatively optimistic tone on disinflation, though he still exercised caution regarding future policy decisions. The markets are now factoring in an 18-basis-point reduction by the Fed by September and a total of 45 basis points by the end of the year.

Powell's comments have fanned the flames of rate-cut enthusiasm. Tonight's data, particularly jobless claims, will be under the microscope, especially given the recent uptick in continuing claims to the highest levels since 2021. If the data aligns with expectations, the euro might get a leg up, possibly pushing towards the 1.0800 mark.

Meanwhile, across the Channel, the tension among French politicians is easing, with the yield spread between the 10-year French and German government bonds narrowing to about 71 basis points from a peak of 82 basis points late last month. This could further support the euro’s ascent.

However, even if the dollar stumbles, the euro might not have the characteristic strength to capitalize much further than 1.08, relying more on the dollar's weakness than its inherent strengths.

So, keep an eye on those jobless claims – they might hold the key to the next chapter in this currency saga.

Political developments have helped the US Treasury curve to steepen from the long end. However, we anticipate renewed attention on monetary policy will shift the steepening towards the front end shortly. This week's jobs data might validate the ongoing cooling trend in the US labor market.

The likelihood of a hung parliament is increasingly becoming the baseline scenario in France. This political uncertainty is making waves, but monetary policy and economic data will likely drive the most significant market movements in the coming days.

All market roads converge on this week's key Non-Farm Payroll (NFP) data release. Just how crucial is this report? Very. The Fed has hinted that the recent nonfarm employment growth figures have likely painted an overly rosy picture of the US labor market's health. Put another way, NFP growth could be overstating the underlying strength of the US labor market. So far this year, we've seen an average of around 250k monthly job gains.

Friday's June NFP report will need to reveal a significant slowdown in employment growth to push US rate market participants towards pricing in a much faster pace of Fed rate cuts in the upcoming year. If the numbers come in soft, it could catalyze a reassessment of monetary policy expectations, potentially setting the stage for accelerated rate cuts, a softer US dollar, and the S&P breaking fresh higher ground again. Buckle up because this report could be a policy game-changer.

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