Surprise US job weakness casts serious doubt on Fed rate hikes
Lead — The recent US jobs report has cast significant doubt on the Federal Reserve's rate hike trajectory, with unexpected job losses signaling potential risks to growth. This data prompts a reassessment of outlooks ahead of the September FOMC meeting, where economic indicators will weigh heavily on potential policy changes. Per the full note from ING, the US economy lost 23,000 jobs in July, with revisions to previous months further complicating the outlook. Market expectations for rate hikes have diminished as participation rates drop and wage growth slows, which could dampen the Fed's inflation-targeting stance.
What the desk is arguing
The overarching thesis is that the recent US employment data radically alters expectations around future Federal Reserve interest rate increases. According to ING's analysis, this month recorded a net loss of 23,000 positions which, when compounded by significant downward revisions from previous months, reveals a concerning trend in job growth.
Notably, the unemployment rate dipped to 4.1%, but this was misleadingly driven by a decline in the participation rate to levels not seen since the 1970s. The alarming reduction in non-farm payrolls, especially within leisure, hospitality, and retail sectors, points to corporate caution that may undermine economic resilience and reflects a broader downward trend in labor market strength.
Where it sits in our coverage
Our consensus target for USD/EUR is 1.075, with a range expected between 1.04 and 1.12. Firms contributing to this view include: - jpmorgan: Target 1.10 (Mar26) - bofa: Target 1.04 (Mar26)
This perspective aligns with the views from jpmorgan, who expect a moderate strengthening in the Euro, while deviating from bofa, who forecast a more bearish scenario that pressures the dollar upward. The desk believes this shift represents the lower bound of prevailing forecasts, indicating increased uncertainty for traders in the FX space.
How other firms see it
The consensus among aligned firms suggests growing apprehension around US monetary policy tightening, particularly from jpmorgan, whose forecasts reflect increased economic caution due to labor market weaknesses. On the contrary, bofa positions for a bearish USD, indicating divergent views on the overall health of the US economy.
Markets should keep a close eye on related pairs such as USD/JPY, where divergences in central bank policies may prompt volatility, and the trajectory of EUR/USD reflects broader market sentiments on US rate hikes versus Eurozone economic recovery.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The US economy experienced a surprising loss of 23,000 jobs in July, heightening uncertainty around Fed rate hikes.
- 02The unemployment rate fell to 4.1%, but due to a significant drop in labor participation rates, raising concerns about economic engagement.
- 03Wage growth slowed to 3.2% year-on-year, suggesting diminished inflationary pressures that may influence future Fed decisions.
- 04Market expectations for upcoming monetary policy shifts are increasingly cautious, reflecting growing corporate hesitance.
Market implications
Traders should monitor USD/EUR closely as it approaches critical support levels maintained around 1.075, especially in light of potential shifts ahead of the September FOMC meeting. A sustained breach below this threshold could trigger further bearish assessments.
Risks to this view
A significant catalyst that would challenge this outlook could be better-than-expected economic data leading up to the FOMC meeting, particularly indicators of strong wage growth or increased job creation that might prompt the Fed to maintain or raise rates.
Articles Surprise US job weakness casts serious doubt on Fed rate hikes Published 14:15 United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The US lost jobs in July and while the unemployment rate fell, it was for bad reasons. Rate hike expectations have declined, but there is a lot happening before the 16 September FOMC meeting James Knightley Construction was one of the few bright spots in an otherwise weak US jobs report for July -23,000 US jobs lost in July Employment fall highlights corporate caution The US jobs report for July was surprisingly weak, with payrolls falling 23k while there were 103K of downward revisions to the past two months' data, leaving the 3M average at 20,000. The unemployment rate fell to 4.1% from 4.2%, but not for good reasons.
It was primarily because of a further drop in the participation rate – unemployed people leaving the workforce entirely. Average hourly earnings growth slowed to just 3.2% year-on-year from 3.5%. In terms of payrolls details, the leisure and hospitality sector lost 40k jobs, which may reflect the conclusion of the FIFA World Cup, but we had also seen a 43k drop in June when it was in full swing.
The financial sector lost 14k roles while retail lost 19k. The offsetting strength was in construction (+22k) and, as usual, private education and healthcare services (+25k). The chart below shows the cumulative job creation since December 2022 and indicates that, after a decent March and April, we have reverted to the very weak trend experienced from January 2025-February 2026.
Cumulative increase in US employment since December 2022 (000s) Source: Macrobond, ING "> Source: Macrobond, ING Disengagement drives a fall in participation Regarding the drop in the unemployment rate and why this isn’t the great news it seems, we have to look at the participation rate. It fell to 61.4%, which, outside the pandemic, we must go all the way back to the mid to late 1970s to find a lower reading. A quarter of a million people left the labour force last month.
Within that, the number of people classifying themselves as employed fell 87k while the number of people classifying themselves as unemployed fell 178k. Therefore, the fall in the unemployment rate was caused by disengagement rather than for any positive reason. You can see that the participation rate has fallen by more than a full percentage point over the past year.
If it had held steady, we would have a US unemployment rate in excess of 5%, and we would not be talking about a possible September rate hike from the Federal Reserve. Labour force participation rates Source: Macrobond, ING "> Source: Macrobond, ING What it means for the Fed outlook Reaction has been significant, with 2Y yields down 8bp and the dollar softening, while Fed funds futures contracts are now only pricing 10bp of a potential 25bp hike on 16 September. Today’s outcome supports our call for a prolonged pause from the Federal Reserve, but remember that ahead of the September FOMC meeting we have a further jobs report, two inflation prints and the Federal Reserve’s Jackson Hole Symposium.
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