Euro gains 0.2% as soft ADP data trims Fed hike odds

The euro climbed to a two-month high near 1.1560 Wednesday as July ADP hiring of 44,000, far below the 70,000 forecast, and sliding oil prices cut September Fed hike odds to 56 percent.

"FOMC participants broadly agree that the labor market is in balance but are more divided over the durability of the inflation threat," strategists at Brown Brothers Harriman said, leaving fed funds futures more sensitive to inflation than employment data.

EUR/USD traded around 1.1554, up nearly 0.20 percent on the day, while the dollar index slipped below 100 to 99.70, its lowest since late June. The 10-year Treasury yield fell to 4.61 percent and the two-year to 4.20 percent, while gold surged $188 to $4,246.79 an ounce. ADP's report showed education and health services added 36,000 jobs, while goods-producing and cyclical sectors shrank.

The data, following Tuesday's weaker-than-expected JOLTS job openings, sets up Friday's nonfarm payrolls as the key test. If payrolls print below 44,000, the narrative shifts from falling hike odds to a finished tightening cycle, potentially pushing September odds below 45 percent and driving the euro and gold higher. A reading above 120,000 would reverse the rate narrative and could erase half of Wednesday's moves.

Rate Differentials Narrow as Oil Cools Inflation

Oil prices extended declines as the United States, Iran and Oman neared an interim agreement to reopen the Strait of Hormuz, with an announcement possible as early as Wednesday. WTI crude fell 5.5 percent on the day. Lower energy costs ease inflation pressure on both sides of the Atlantic, though U.S. inflation still runs above the Fed's 2 percent target, limiting the dollar's downside.

The dollar index's slide below 100 marks its first sustained break of that level since late June, when a softer inflation print first raised the prospect of a September pause. Since then, the index has whipsawed between 99.5 and 101 as policymakers split over whether disinflation is durable enough to justify holding rates. The last time the index traded below 100 for a sustained stretch was in the spring, when markets priced a full easing cycle that never materialized.

ECB Path in Focus as Energy Costs Ease

For the eurozone, falling oil prices could reduce the need for another European Central Bank rate increase, as the latest inflation data suggest price pressures are moderating after picking up earlier this year on the surge in energy costs. The eurozone composite PMI hit an eight-month high of 52.0 in July as inflation cooled, reinforcing the case for a pause. That dynamic complicates the euro's outlook: weaker energy inflation supports the currency by easing the case for aggressive ECB tightening, but it also removes a source of rate support.

Wage data complicate the picture. ADP showed job-stayers' pay rose 4.4 percent from a year earlier, while job-switchers saw a 7.0 percent jump, the fastest acceleration in almost a year — evidence that tightness persists in pockets of the labor market even as headline hiring cools. The ISM services index edged up to 54.1 in July from 54 in June but missed the 54.5 forecast, adding to the picture of a slowing but not collapsing economy.

Friday's payrolls report will determine whether Wednesday's repricing holds. Markets have already priced a dovish bias, so the bigger risk is an upside surprise: all forward employment signals point to cooling, making a reading above 120,000 the largest potential shock. Next week's July CPI will then test whether the rate narrative rests on labor alone or is reinforced by easing price pressures. The Federal Open Market Committee next meets in September, when the rate decision will hinge on the cumulative evidence from both reports.

This article is for informational purposes only and does not constitute investment advice.