Stronger Jobs, Stronger Dollar: What It Means for EUR/USD, ECB, and the BoJ

Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halperny, Head of Research, Global Markets, EMEA and International Securities. It's Friday 5th June 2026 and joining Derek to pose some questions on the financial market themes for the week ahead is Chris Jakubowski, FX Institutional Sales. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.

It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hi Derek.

Alright Chris, how are you? Very well thank you. Good, good.

So let's kick things off with the NFP, it's rocked the markets, although I haven't moved too much on the back of it, but certainly the number I think changes the narrative somewhat. 172k on the main print, it's like two times the consensus now. April's number as well, I mean that locked in this sort of stalemate for the Fed. It feels like suddenly you know this one has sort of blown the doors off it and we're looking now to heights being priced and which they are now in December.

How do you see this number, first of all what's your take on the number and how's it changed your outlook for the Fed? Yeah, no absolutely. It's way stronger than expected.

You just mentioned the previous month, so looking at the last three months you're talking 214, 179, 172. It's hard to come to any other conclusion other than the labour market is strengthening and it's in decent health. Now of course, you know, there are caveats, you can dig into it as you always can with such an extensive report.

Private services producing employment was much less because we had, there was manufacturing, construction jobs, construction obviously weather related, we also had a big jump in government jobs, 32,000. So private services producing was 92,000, 40 of that was education and health and the blowout was leisure and hospitality, which again, that's some weather on that, which was up 70,000. Other private services producing were negative, so you had minus three on trade, trade retail was minus one, financials minus 22.

So there were, you know, a few different elements that were negative still, so there are still some signs of weakness, but you know, you can't say anything other than this was a decent strong report. The household survey as well, 149,000 increase, labour market increase 83,000 and that kept the unemployment rate steady at 4.3. But yeah, you know, I can completely understand the market's pricing for a December move.

September is 10, 11 basis points just before we came in, so we're nearly 50, 50 on a September move, which again, I can understand, yeah, like the only saving grace would be a deal in the Middle East, crude oil drops pretty noticeably, which I'm not convinced crude oil will drop pretty noticeably, but if it did, then pressure risks obviously on inflation come down and maybe the Fed can ease off in terms of their concerns about medium inflation, but you know, they've got a dual mandate. Yeah, the employment is still running hot, right? It's full employment and price stability.

And if you look at it on real wages as well, I mean, inflation is up there, we're getting to, you know, into a negative real rates, right? So yeah, yeah, like my take would be ultimately, I completely understand the rates move. I think September becomes potentially fully priced if we stay the same way in the Middle East and we see crude, you know, potentially drifting back above 100 and, you know, even I still think we're getting to a potential tipping point from the Middle East because, you know, the longer the Strait of Hormuz remains closed, the tightness in the pipeline is going to start coming through more and more clearly, and I think that's going to ultimately result in a jump in crude oil prices.

You know, we had a range at the beginning of the Middle East crisis of 120 to 160 on, you know, problematic military conflict, prolonged closure of Strait of Hormuz. We're well below that, but I still think it's a valid range to be thinking about if things don't get resolved. Yeah.

And then it becomes impossible for the Fed to be anything other than signaling to the markets the potential for a move. Now, I don't deny that, you know, the economy has its weakness and the Beige Book kind of illustrated that this week. That's the report for the FOMC meeting.

And, you know, the consumer side of the economy is weak and low income and middle income earners seem to be struggling. And all the benefits of AI and equity valuations is really supporting the high end income earners. It's that area that's driving the consumption.

But of course, that's a relatively small part of the economy. So there are still vulnerabilities there. But as we sit here today, you know, the risks are clearly that if things don't change, that, you know, the markets are going to continue to increase.

And what you're saying, I mean, because we've got inflation next week, right, CUSPPI, I mean, if that sort of comes in, which expectations are around four handle, you know, and we're at 375 on the rate, I mean, that's got to just add even more pressure, right, after that. I mean, it's kind of the perfect storm for hikes, right? So.

Yeah. Like the CPI would probably still obviously show it's very much kind of gas and energy related. Yeah, of course.

But the point is that it's not transitory if the economy is strengthening or the risks change in terms of transitory becoming something more problematic. And, you know, I think the next week will still very much show it as gasoline and energy related. But that nearly becomes less of a point because of what's happened with the labour market and the risks of it broadening out.

And again, going back to the Beige Book, there were reports in districts of strengthening inflation pressures and broadening inflation pressures. So in that sense, the risks are still definitely rising. Yeah.

I mean, that sort of brings us on quite well to sort of the ECB, which is coming up next week as well, because, you know, you mentioned there sort of transitory and looking at inflation that way, you know, you then look at the ECB, which then sort of it seems in sort of fear mode of not hiking, you know, when they should. And to me, it feels very sort of like they're putting much more of a weight on the inflation, which arguably could be transitory when the economy arguably isn't running as well as the US. Yet the US hold back.

But we've priced in a full 25 basis points now for the ECB to go. You know, do you think they're making a mistake by doing that and hiking while the Fed isn't? You know, maybe doing something similar to 2011 when they had that energy shock and they hiked and then they had to reverse straight away.

I mean, what's your take on the ECB next week? Yeah, I think 2011, let's let's keep that separate, because I think that the backdrop is completely different. We were in the midst of, you know, a debt crisis in Europe at the time, and that was clearly a mistake.

I don't class this necessarily as a mistake. Our view is this is what they should be doing now. Again, you know, we had GDP data today.

It contracted. So that's obviously going to have people arguing that, you know, the ECB potentially are making a mistake. But of course, Ireland is a big part of that, you know, small, small Ireland where, you know, GDP is so volatile.

We had a quarter on quarter contraction of over 12 percent in Ireland, which is very much related to the volatility of large multinationals based in Ireland. A better, more underlying picture of growth in Ireland paints a better picture. But the GDP, as it is, minus I think it was minus 12.1 percent gets fed into the headline for the eurozone and that results in the contraction.

Ex-Ireland eurozone GDP was between 0.2 and 0.3. So, you know, I think the underlying picture is still OK. I'm not saying, you know, I'm bullish on the eurozone economy.

I'm not. But the point is, it's balancing up those risks. And given the fact that the ECB's policy stance is at neutral and that's not the case in the UK or in the US, they need to be acting potentially a bit more quickly to put in that insurance of some restrictiveness in the stance.

And, yeah, they'll they'll hike, they'll hike on Thursday and we think they'll hike once more. Yeah. The problem with the pricing, though, is that nearly three hikes are priced.

So I do think we're in overdone territory and why we're bullish on the dollar and we kept our bullish dollar scenario over the short term and our forecasts that we released on Monday is going back to that relative rates. We think Europe now is somewhat overpriced in terms of what's delivered and we thought. Potentially, the US was underpriced.

Now, I'm not saying necessarily the Fed will deliver, but I just think there's more that can go into the curve and and certainly after today, the delivery of a hike is much more plausible. So we're kind of nearly at the capacity and you can argue that even outside of Europe, look at the RBA. The RBA was preemptive and hiked three times.

They've now signaled that they can stay on the sidelines, assess the impact of the Middle East conflict on inflation in Australia. So they're kind of done for now as well. And the BOJ has 50 basis points priced.

So even though we think the BOJ will be hiking again, I don't think they're going to do more than two hikes in the rest of this year. So, you know, outside of the US is is quite well priced, whereas you now clearly will have greater dates about the pricing of rate expectations in the US after this Charles report. Yes.

Then what's your take then on the euro and the fact that, you know, it's it's just it's not it's not there's nothing moving in favour of it in the sense that, you know, there's expectations here that they should hike. They're going to hike. Do you think just the fear of the economy?

And the fact that the underlying strength of it is just weighing too much on, you know, any positivity around the euro, especially against dollar? Or do you think this is purely led, you know, the weakness in euro dollar is led by the dollar leg and it being, you know, more down to the Middle East? Yeah, like I think it's that relative rate story that I just spoke about.

And again, I've mentioned on previous podcasts that, you know, the driver of FX is reverting back to the traditional right spread driver. The correlations are strengthening on that front, whereas on risk and to a degree crude oil, the correlations are weakening. So I think relative rates is becoming more important again.

Yeah. In terms of Europe, I I think it's really a dollar story. And you can't talk about just the relative macro as being the reason for dollar strength.

You've got to incorporate the Middle East, because, of course, if there was a sudden deal and crude drops, I don't think it's going to drop below mid 80s. But still getting down initially, that's another big drop. Ten dollars, maybe that has implications for the dollar as well.

So you've got to take it in combination. But now after the jobs report, again, the macro is just that little bit more important than it was in terms of the factor behind why we think the dollar can extend further from here. And then that probably moves us perfectly on to dollar yen then.

I think we need to just talk briefly on that and get your thoughts, because obviously we're back up at or above 160 now for the third straight session this week. Right. And, you know, they spent 74 billion trying to bring it back down, dropped four big figures or whatever.

It's just it's just it's just not working. Right. So, I mean, do you think they'll go again?

And what are your thoughts like? Or are they going to, you know, there's lots to chat about the simple fact of what you've been touching on throughout this is on the rates differential. And that being a bigger factor, you know, the fact that you said just before as well, I think they'll go once or maybe twice.

Now, if we start pricing in the Fed going once, we're kind of they're going to struggle to get the yen down. Yeah, absolutely. The reason why it failed in April, May 2024 was because US yields were in a high range of between four and three quarters of 5 percent on the two year treasury.

And, you know, we had no drop in yields and therefore that intervention failed. And the other interventions, I've said this before, there were big declines in US rates and that meant intervention was, quote, successful. Now, of course, of course, we can say, oh, it's not been successful, but the MOF are really doing this to buy time.

They just don't want it higher. I'm sure they're well aware that broader conditions means the yen isn't going to strengthen on a sustained basis. So it's probably a little bit unfair.

And I say it all the time that it wasn't successful or they're not being successful. But what is success? How would the MOF define success?

And it's probably just making sure that it doesn't weaken sharply from the 160 level so they can come in again. But of course, there could come a point where they go, hang on a second, you know, we're spending money and ultimately we're going to go higher. The fundamentals are moving that way and it becomes plausible that they could stand back.

And especially like we know now today, the reserve data from Japan came out, the breakdown of their FX reserves, the cash deposit figure stayed the same at around 162 billion. But the securities holdings dropped by 75.5 billion. Pretty much as the figure you just mentioned, the intervention, pretty much in line with that.

So they basically sold US treasuries to finance this. Now, they could go back to deposits, 162 billion, they could utilize that. But ultimately, there does come a point where it starts to look counterproductive to be doing potentially.

That would be escalation of the Middle East, the Fed actually raising rates later in the year, you know, that kind of scenario, which looks a bit more credible today than before. But right now, I think they'll probably keep doing it. But again, going back to what I said about the dollar, OK, the relative macro has turned more favorable for the dollar, but we can't ignore the Middle East and crude oil.

And, you know, the hope in Tokyo would be that, you know, a deal is done. We do get a big drop in, a big further drop in crude oil. And that would alleviate the pressure somewhat.

But, you know, they won't have liked the payrolls figure today. Nor will Trump. Well, Trump, Trump will spout about it.

Oh, absolutely. But, you know, he'll be pushing how strong the economy is, of course. Yeah.

Yeah. So I think we're capped here. I don't think they changed their strategy.

I think they've been so vocal. And of course, we now know they've intervened. So I think they have to nearly stick with it for now.

So I would expect intervention if we get, you know, well above the 160 level. Well, yeah, it feels like speaking to clients definitely feels like the fast money guys definitely around the 160 level become a little bit more risk averse in the sense that they feel like they could intervene and they sort of trim their positions. Yeah.

But the real money, that fast money would probably come in more quickly. Yeah. Once the Trump happens on it.

And then for the real money community, there's people coming out this week as well. You know, certain U.S. funds saying that they're targeting 170 and they're actually looking for it to go higher and supporting that. It just feels this time like.

But then with the payrolls today and then if they get strong CPI, it feels to me like they're going to be. I mean, it's interesting you talking about it from it being a structural point of view that maybe they will get to a point where they're going to have to go. This is the way it's going.

Right. Yeah. Yeah.

Like in a way, your credibility is maintained by being consistent, which means intervening. But then there does come a point where it flips the other way and your credibility is undermined by continuing intervening when it's having less and less impact. So they've got to balance that up.

And, you know, I don't think the the balance has changed after payrolls, but it's definitely altered a bit and it will make them kind of think a little bit more. Yeah. And I think that is just because the Fed.

Yeah, the Fed hike scenarios come into play now. Previously, it was all focusing on the BOJ hiking. And I mean, I know we're going a week ahead of ourselves now for looking ahead to the BOJ.

You mentioned twice, but there's been talk as well this week about the fact that 25 is basically a done deal. It's priced much of the you know, what we're going to be looking for the week. But next will be on forward guidance.

And some have been speaking about the potential for, you know, a jumbo hike or something off markets trying to get get get something back. I think it was even our asset management. I was quickly going to say that wasn't our view.

And I personally don't think it lack. I don't think it has much credibility. To be honest, a jumbo race hike from the BOJ or it also I didn't read the report.

Just what Bloomberg reported, which was that an off cycle cycle. Yeah. I'm going to do that.

So I don't I don't think it's just not the BOJ way. I think even getting explicit guidance on another hike when they hike on the 16th is pushing it. You know what I mean?

Governor Wade's style is quite balanced, cautious. He'll have given the he'll have hiked. So we'd probably be thinking, well, I'll wait till the next meeting or the meeting after that.

And he doesn't tend to give strong forward guidance anyway. Just that consistent message of if the economy continues to unfold as expected, we will raise rates further. And I think that general line will probably be maintained, which does give the markets the signal that they can go again.

And I think December is very plausible. Six month gap is is very consistent with the BOJ's behavior in the past. I think they can certainly deliver that.

What's interesting recently is that we've had some very good JGB auctions on the 10 year, the 20 year, 30 year. We've also seen the JSTA data, the JGB flow data that actually in April, foreign investors stopped buying. They were actually marginal sellers.

But domestic Japanese investor buying broadened out somewhat in April on the back of those better auctions. You know, it's early days, but are we beginning to see with what's priced into the curve for the rest of this year, which would take the policy rate to one and a quarter, then your R-star with a 2% inflation is at minus 75 basis points, which is within the R-star range that the BOJ has cited. It's not their range, but they've cited it.

And more credible BOJ monetary policy and a more credible stance will certainly help to stabilize the JGB market. So encouraging signs from a JGB perspective, even at the same time when they're talking about another kind of fiscal support package on the cost of living support. So yeah, I think they need to go.

Surely in some ways as well, that stability in the JGB market gives them a bit more flexibility about hiking as well. They don't have to be too concerned about destabilizing. You know, on the economic level, it's doing okay, like real wages are doing well and wages, you're actually seeing proper price wage rises still.

And then if the auction is going well in the JGB market, they're unlikely to completely derail that. So arguably, you could say they might have that ability to definitely go 25 next week, which we would and then 25 again in December. Yeah, like I think maybe the pressure would come not maybe from the JGB market now given what I just said, but in the FX markets after what's happened today with the labor market.

So if dollar yen is at 161, or you know, on this intervention, speculation, and even if they've intervened, and we don't go down very much, pressure is going to build on the BOJ to be a bit more explicit. About hiking. Yes.

I mean, they're going to have to be on. I just can't say any other way unless unless, you know, the US economy completely falls out of bed, which can't see happening overnight, we get a resolution in the Middle East, which can't have to see happening overnight. That is the pressure is just going to be building in that that I can't see a way of dollar yen getting down until they are more vocal about saying we were going to hike or the US comes off.

So it's one or the other, isn't it? Yeah, yeah. And certainly, certainly going back to that 170 view, I'm not sure where you saw that, but it's definitely becoming more plausible to say that after after today's data.

Yeah, yeah. Okay, great. Thank you very much, Derek.

Have a lovely weekend. Enjoy next week. Cheers.

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