Forex markets look past the tariff smoke –Jobs take center stage

Jobs take center stage

While the White House unveiled a fresh volley of tariffs—this time with sharper teeth aimed at Canada, Switzerland, and New Zealand—the market barely blinked. The 10% global base rate was left intact, and even steeper levies of up to 41% failed to rattle risk assets in any meaningful way. Why? Because traders have seen this movie before: tough talk upfront, backdoor deals by the credits. A late flurry of handshake extensions, most notably with South Korea and Mexico, effectively dialed down the drama.

So far, the tariff saga feels more like a re-run than a reboot. But that doesn’t mean there won’t be consequences. Yale and Wharton’s estimates suggest U.S. households are staring down a stealth tax, with a projected $2,400 income hit and effective tariff rates rising to levels not seen since the 1930s. Import front-loading bought some time, but the inflation clock is ticking again—and this time, there’s no way to dodge the bill.

The dollar just closed out its best month since April 2022 (DXY +3.19%), with the rally largely underpinned by three pillars: solid U.S. data, a labor market that refuses to roll over, and the growing sense that America can absorb tariff shocks better than most. The Fed, for its part, left rates unchanged but leaned hawkish. Powell made clear that while inflation hasn’t been tamed, the labor market remains the true north. And until that compass swings south, easing remains a high bar.

Initial claims held firm below 220k for a second week—a feat not seen since January. The Q2 Employment Cost Index showed wages still grinding higher, and even job-cut data (Challenger layoffs) stuck close to post-COVID norms. For now, there’s simply no evidence of a fracture in the jobs engine room.

That sets the stage for today’s payrolls. The market consensus is around 104k, with a whisper closer to 120k; our base case is 115k with unemployment nudging to 4.2%. On the surface, that should still be a goldilocks print—soft enough to keep the Fed patient, firm enough to support the dollar. But with the greenback already flexing hard through July, positive surprises are now priced in. Unless the data outright crushes expectations, today could be more consolidation than continuation.

That said, a sub-75k headline would force the market to take a serious look at the September cut probability, now priced at just 10bps. But barring back-to-back misses and a dovish CPI, the Fed’s current hand looks set.

Over in Europe, soft German inflation data (1.8% y/y) hasn’t derailed broader CPI expectations, which still see eurozone core at 2.3%. That likely keeps the ECB on the fence—hawkish repricing is unlikely, but so too is a renewed dovish impulse. EUR/USD has room to test 1.130 today if U.S. payrolls land strong, but with long positioning less crowded after recent euro softness, the downside risks feel more tactical than structural.

This tape is telling us something: we’re in a data-dependent regime, not a headline-driven one. Tariff fatigue is real, and while the eventual impact will show up in inflation and real growth, traders are still pricing the now. The dollar remains a yield and resilience trade, but its July performance has front-loaded a lot of the good news. If today’s jobs report merely meets expectations, we may be looking at a market that pauses, reloads, and then turns to the next big test—August CPI.

Until then, the narrative has shifted. It’s not about the firestorm of tariffs. It’s about whether the U.S. labor market still has the firepower to keep the Fed on hold.

Payroll crossroads: A market hoping for just soft enough

Wall Street heads into Friday’s jobs report not just looking for a print—but praying for a perfect one: not too hot to rattle the Fed, not too cold to suggest the wheels are coming off. The Goldilocks scenario is alive and well.

Consensus expects +104k NFP for July, a notable slowdown from June’s +147k, yet still above the Fed’s breakeven threshold of 80–100k (per Barkin). The unemployment rate is penciled in at 4.2%—a modest tick higher, but well shy of the 4.5% year-end level forecast by the Fed. The Street's whisper has nudged back up toward 120k after dipping mid-month, suggesting the bias has quietly shifted higher.

The Fed chair has made it clear: the unemployment rate is the North Star when it comes to labor market health. While inflation still commands center stage, Powell conceded that downside labor risks are growing. The Beige Book’s tone was measured—employment up slightly, hiring cautious, layoffs limited but rising in manufacturing. The key point? No one’s panicking, but no one’s hiring with swagger either.

Recent data threads the same needle. Initial claims fell to 221k in the survey week. The ADP print was underwhelming. JOLTS softened. Challenger layoffs climbed. And yet, the S&P Global employment index showed job growth for a fifth straight month.

This is the stuff of soft landings—or softish ones, at least.

Alternative data and big-data proxies point to 95k private sector jobs in July—twice June’s pace, but still subdued. Government hiring may flatline due to the federal hiring freeze, though state and local payrolls remain resilient. Meanwhile, manufacturing could feel the sting of Trump’s tariffs as they work their way through input costs and capex intentions.

And don’t forget immigration. A slowdown in arrivals is quietly cooling hiring in sectors most reliant on immigrant labor. This won’t crater payrolls —but it may slow the rebound.

Markets have come to terms with a Fed that’s more patient than punchy. With inflation sticky and payrolls stable, the September FOMC is shaping up as a tactical pause rather than a pivot. Powell’s press conference left the door open—but made clear they’ll need more than a faint whiff of labor weakness to cut.

Waller and Bowman dissented dovishly last month, but for now the bar remains high. Only a real downside shock—something sub-80k or a URate sprinting to 4.5%—would credibly jolt the Fed into action early.

Market reaction matrix: Skewed to the upside

According to JPMorgan’s playbook:

• >140k: SPX up 1–1.5% [5% odds].
• 120–140k: SPX +0.5–1.25% [25%].
• 100–120k: SPX +0.25–0.75% [40%].
• 80–100k: SPX down 0.5–1% [25%].
• <80k: SPX down 1.5–2.5% [5%].

The takeaway? Unless Friday’s report seriously disappoints, risk appetite is unlikely to unravel. Whisper numbers are rising, vol is compressing, and the market is positioned for “just right.”

Goldman’s take: Tail risks exist – But not this Friday

From their macro team to vol desks, the message is consistent: the bar for a real left-tail scare is high. Equity sentiment is neutral, upside optionality is cheap, and any selloff is more likely to stem from positioning or earnings fatigue than payroll panic.

For now, semis are vulnerable, growth is priced generously, and job creation—while slowing—isn’t falling off a cliff. Vol desks note that post-NFP, we’re mostly catalyst-free into late August, suggesting any reaction may be sharp but short-lived.

The preferred tactical stance? Lean long but layer protection. Upside skew remains attractively priced, while front-end rate vol offers cheap hedges if jobs undershoot badly. Investors are unlikely to abandon equities unless the labor picture cracks wide open—and Friday’s data isn’t expected to carry that kind of dynamite.

In sum, the market doesn’t need fireworks—it just needs a steady beat. A +100k print with a 4.2% unemployment rate keeps the music playing. A hotter number delays the Fed, but won’t tank risk. A real miss? That’s when the lights go out. But for now, the dance continues.