US Nonfarm Payrolls Surprise: What are the FX Implications?

Indeed, the FOMC hinted as much, as only days earlier its Chair Jerome Powell had suggested that all options, including a rate cut, remained on the table for the July 30 meeting.

Yet, the jobs market confounded expectations, with payrolls rising by +147,000 compared to estimates of +110,000. Not only that, upward revisions to the data for previous months, as well as a drop in the headline unemployment rate to 4.1% (a rise to 4.3% had been expected), strongly suggest that the US economy remains resilient and in rude health.

This has all occurred despite the intense uncertainty created by Trump’s tariff threats and his plans to blow out the Federal budget.

Rare good news for the dollar

This release has been a rare piece of good news for the dollar, as it effectively takes that July 30 rate cut back off the table, maintaining the US’s rate advantage over other major economies.

Jerome Powell has been consistent in saying that the Fed will operate with a ‘data-driven approach’, and so, taking him at his word, this latest data implies that the current environment remains unconducive to looser policy - no matter how much President Trump may protest.

In Trump’s eyes, the US economy could be doing even better without ‘Too Late Powell’ keeping his foot on the brake - conveniently ignoring the fact that it is the potentially inflationary impact of his policies that has prevented the Fed from cutting rates already. Powell has even admitted as much at a recent policy forum.

The result of all this? The pound has risen to its highest level against the dollar since February 2022, as expectations for further policy loosening have been dialled back to a single 25bps cut by year-end. Just one month ago the expectation was for two, or even three cuts. Added to this, the UK has managed to find its way into Trump’s good books. It has avoided the worst of his punitive tariffs, and even agreed a bare-bones trade deal. This marks the UK out as a relative haven in a world pummelled by Trump’s brand of diplomacy, lending a further fillip to GDP/USD prospects.

A short-lived boost

While the better-than-expected jobs report had a modest positive impact on the dollar, the boost was short-lived as other challenges to the currency continue to loom large.

Case in point - later that day, Trump’s much vaunted ‘One Big, Beautiful Bill’ was officially passed into law after Republican holdouts caved in overnight. With the latest estimates from the independent CBO suggesting that the bill will add US$3.4tn to the deficit over the next decade, this provided added impetus for foreign investors to retreat from US Treasuries, reigniting downside dollar pressures.

It is this disregard for norms and financial stability that has undercut much of the dollar’s traditional appeal as a safe haven when times are tough. This has contributed to it falling by more than 10% in the year to date, despite the extraordinary amount of geopolitical uncertainty permeating across the globe. This judgement does not change much with the release of slightly better economic data in the present.

Trump’s trade policy sparks uncertainty

The other major area of concern lies with Trump’s attitude to trade policy. The temporary reprieve on his ‘Liberation Day’ tariffs will expire on July 9, so unless America’s major trading partners can rush through comprehensive agreements before this deadline, we can expect to see a surge in the price of imports and the re-emergence of the inflationary pressures that have Fed Chair Powell so worried.

Only two major trading partners so far, the UK and Vietnam, have been able to reach an agreement with US policymakers ahead of the deadline. The increasingly fraught negotiations with major allies the EU and Japan could be the most consequential if no agreement is reached, with tariffs of 50% and 35% respectively set to be triggered in the event of no deal.

The resulting surge in import costs could provide further justification to delay the next Fed rate cut should inflation rebound. Yet, this would strengthen Trump’s resolve to undermine or push out Powell before his term is officially up in May 2026, as he looks to install a more compliant Fed Chair who will slash interest rates for him. Should this happen, the last pillar of support for the embattled dollar could be demolished, and we could be in for a shaky ride.