NFP Shock: Why the USD Collapses and What I Expect Next

The July Non-Farm Payrolls report stuns the market—only 70,000 jobs added, far below expectations of over 100,000 and down sharply from the prior 142,000. This massive miss rattles sentiment. The unemployment rate ticks up to 4.2%, confirming a clear cooling in the labor market.

Markets react instantly. EUR/USD surges from 1.14 to 1.16 USD/JPY drops from above 150 to 148, and gold continues its breakout. The US Dollar Index (DXY) plummets from over 101 to under 98.

What drives this shift? The FedWatch tool now shows a 75% probability of a 25 bps rate cut in September, up from under 50% pre-NFP. This is a major pivot. For most of July, the market had priced in a “higher-for-longer” Fed, but now, with weak jobs data and falling bond yields, the narrative has flipped.

The labor market weakness gives the Fed political and economic cover to ease. Investors know a rate cut lowers yield appeal—so we see immediate capital outflows from USD and inflows into gold, yen, euro, and commodity currencies.

I expect EUR/USD to push toward 1.20, and USD/JPY to retreat to 140 by quarter-end. My previous USD/JPY target was 148, but given this structural shift, I adjust lower.

Looking ahead, the key focus is on FOMC member speeches this week. I want to hear how policymakers digest the weak NFP. Do they embrace a dovish pivot, or talk it down? Either way, the dollar is on the defensive.

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