Payrolls déjà vu threatens the dollar’s rebound

Today’s weak US non-farm payrolls data has undone much of the dollar’s rally this week. While the DXY index is still on up the week, and ~2.5% stronger since the start of July, the increased risk of a recession in the US and the consequent drop in US interest rate expectations threatens to undermine the dollar’s prospects. Our forecast for the dollar to strengthen in the second half of the year relies in large part on our view that the US economy will remain resilient and the FOMC keep policy on hold until 2026. Plainly, that now looks less probable; in a recession scenario the dollar is likely to weaken against lower yielding currencies such as the yen and the euro, even if it may rally against other, riskier currencies.