In terms of Non Farm Payrolls (NFP, we had a below forecast number, which has seen Investors now see an 80% probability to a 25bp rate cut from the Federal Reserve in September. The USD, DXY has steadied after a major sell off but can it rally from here, or will we see a move back to recent lows?

Below Forecast NFP

In terms of poor jobs data, we had an unusual move by Federal Reserve dissenters Chris Waller and Michelle Bowman released rare joint statements 30 minutes ahead of the jobs data, explaining their dovish position. This could have been an attempt to exert maximum pressure on Chair Powell should the jobs numbers prove weak – which they were.US nonfarm payrolls rose by 73K in July 2025, well below expectations of 110K. The June figure was sharply revised down from an initial 147K to just 14K, while May's reading was also cut by 125K. Taken together, these revisions show that employment in May and June was 258K lower than previously reported. The unemployment rate ticked up to 4.2% as expected.

So why was the report so poor?

The Rotation of Workers

 The one aspect of the jobs report that got zero attention from the mainstream forecasters was also the most important one: namely, the ongoing decline of illegal workers from the payrolls. The number of foreign-born workers fell by 467K. What about native workers? In July, native-born workers moved up by 383K, which was impressive but was less than half the 830K increase in June; both, however, were below the huge 1.04 million increase in April.

Some charts below on the rotation from non native to native workers.

This rotation back to native born workers is showing up in wage data, where wages were above forecast in the report.

The report on the face of it looks bearish and shows a weak jobs market but digging deeper we can see there is a rotation going on from foreign workers to native workers, and wages are rising, which is inflationary.

September Rate Cut Odds

We have seen September rate cut odds soar higher, to a 25bps cut in September priced at 80% and a total of 59bps of loosening by year-end and we have seen treasuries fall hard in response.

Where will the USD go from here? 

We have seen the market move to price a September cut, and while we think this is likely, but it's now discounted. We also need to keep in mind that the US economy is stronger than most of its rivals.

In conclusion, we agree with this view: 

1. Market pricing for the Fed is still very dovish, which means there’s still plenty of scope for rate cuts to get priced out, especially in the remainder of 2025.

2. As trade tensions fade, markets will likely refocus on US growth outperformance, which means the US “exceptionalism” narrative may come back stronger than ever.

3. The extreme level of Dollar shorts took many months to build, so there’s still a lot of unwinding of this positioning to be done. This short squeeze is far from over." (Robin Brooks)

Three things have stood out to Robin Brooks:

"First, markets have been pricing more rate cuts from the Fed than from the rest of the G10, which never made much sense given the inflationary impulse from tariffs. As US inflation began to pick up, the Dollar came under mounting appreciation pressure....

Second, even though there’s been a lot of negative talk about the Dollar, markets never really gave up on the US “exceptionalism” narrative. Foreign flows into longer-term assets like Treasury bonds and notes, as well as US equities, were at all-time highs in May after comparatively modest outflows in April....

Third, the positioning in foreign exchange markets had become extremely short of Dollars. The Japan trade deal signaled that the US is seeking to de-escalate global trade tensions. The trade deal with the EU underscored that, sparking a formidable short squeeze and rise in the Dollar."

Sentiment 

We have seen some reduction in terms of USD shorts on the COT Net Traders Positions, but speculative shorts remain elevated historically, which we think points to more USD upside.

Technical Analysis