The dollar index rallied back from losses on Friday as rebounding Treasury yields ahead of the long Labor Day weekend took the sting out of a jobs report that suggested diminished inflationary pressures nL1N3082XU.
Though the non-farm payrolls report revealed a workforce that could loosen the drum-tight labor market nAPN0PH3MH, investors appeared reluctant to push Treasury yields too low in the face of accelerating quantitative tightening and the Fed's pledge to tighten regardless of higher joblessness.
The initial risk-on response to the goldilocks U.S. employment data boosted the risk-sensitive EUR/USD to a 1.00335 high on EBS before shedding most of its gains.
Thursday's 0.9910 low and August's 20-year low at 0.99005 remain pivotal heading into Thursday's ECB meeting, as well as Tuesday's ISM services report.
EUR/USD's early rally and broader dollar setback were largely on the prospect of looser labor supplies and less inflation.
If the workforce continues to expand, erasing more of the pandemic driven drop, it could reduce wage pressures and supply-side bottlenecks and lighten the Fed's rate-hiking load.
But the Fed is still expected to hike rates 75bp in September on the way to a March peak at roughly 3.85%, about 10bp lower than the pre-payrolls peak.
EUR/USD could hold within its recent 0.9900-1.0100 range ahead of Thursday's ECB meeting unless ISM services departs significantly from expectations nL1N30912J.
An aggressive 75bp hike remains favored, but beyond that the ECB's forward guidance and balance sheet machinations will be scrutinized.
Sterling fell 0.28%, reversing earlier post-payrolls gains, still hobbled by extraordinarily high UK inflation forecasts and new leadership.
Sterling remains close to its 2016 Brexit vote and 2020 pandemic troughs at 1.1491/13.
The overbought USD/JPY fell 0.05% after making a 24-year high at 140.80 and then falling to 139.90 amid cross-currents of gyrating Treasury yields and late risk-aversion that boosted the haven yen somewhat.
With no BoJ rate hikes on the horizon and 10-year JGB yields already dragged up to the 25bp yield curve control cap earlier, a resumption of the uptrend in Treasury yields would go unopposed.
But for now there's some risk of correction before the next push to new 24-year highs nL1N3091BV.
High beta currencies also shed early gains as early Treasury and stocks gains were reversed.
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