Dollar Sold Ahead of Jobs as Court Halts Section 122 Tariffs

A federal trade court order halting Section 122 tariff collections and a fresh flare-up in Middle East hostilities did little to interrupt dollar selling on Friday. The greenback softened across the board, with market focus squarely on the April US employment report. The Fed funds futures curve provided the clearest explanation: barely 2 basis points of additional tightening are now priced for 2026, down from nearly 8 basis points at the start of the week. That collapse in rate-hike expectations has drained the dollar’s carry advantage, even as the ceasefire between Israel and Iran remains tenuous and a US court delivered a narrow but symbolically potent rebuke to the administration’s trade policies.

From Tariff Relief to Rate-Pricing Collapse

The court ruling itself was procedurally narrow (a 2-1 vote to stop collection of the tariffs), yet its timing amplified the view that trade uncertainty is weighing on the economy and curbing the Fed’s ability to tighten further. The Middle East flashpoint, meanwhile, has followed a familiar pattern: a frayed ceasefire that remains nominally intact until May 17, with neither side rushing toward full-scale conflict. As is often the case, markets initially shrugged off the headlines. But the real transmission for forex traders runs through the US rate complex. Two-year yields edged lower while 10-year Treasury yields slipped 1–2 bp to around 4.37%, leaving them roughly 7 bp softer on the week. S&P 500 futures tacked on 0.45% and Nasdaq futures 0.6%, suggesting that the same force depressing the dollar was also propping up risk appetite.

The better read here is not that geopolitical calm returned. It is that the shrinking Fed tightening premium has become the dominant driver, overpowering tariff relief or conflict noise. When only 2 bp of hiking remains priced, the dollar’s yield support essentially vanishes. Gold consolidated below its two-day high near $4,765, while crude oil (June WTI) briefly poked above $98.65 before settling near $95.20, failing to sustain a geopolitical bid. This is textbook macro transmission: a collapsing rate path flows into lower front-end yields, a softer dollar, and a modest bid for equities, while commodities linked to real demand or safe-haven flows struggle to find a uniform direction.

EUR/USD: $1.18 Options, German Data, and a Long Squeeze

The euro tested the $1.1775 area in European trade, trying to extend Wednesday’s rally toward $1.1800. For the second straight session, however, North American sellers emerged late on Thursday, pushing the pair back to $1.1735 as disappointed longs reduced exposure. Today’s bounce retraced that dip, and options boards are heavily stacked: EUR 1.77 billion at $1.18 and EUR 1.57 billion at $1.1750 expire at the New York cut. Those strikes create natural gravitational zones, making a clean break above $1.18 unlikely before the payrolls print resolves the gamma.

A superficial take would attribute euro strength to economic resilience. The opposite showed up in the data. German industrial production unexpectedly contracted 0.7% month-on-month in March, the first back-to-back decline since September–October 2024. The trade surplus narrowed as imports surged 5.1%, suggesting a negative terms-of-trade shock for a manufacturing exporter. Yet the euro gained. The mechanism is straightforward: the dollar’s rate advantage is crumbling faster than any eurozone headwind can offset. For traders, the risk is a long squeeze if $1.18 caps and stops cluster below $1.1735, but any post-payrolls dollar bounce that fails to break $1.18 could be a reloading opportunity for euro longs.

Yen Intervention Aftermath and Sterling’s Political Indifference

USD/JPY climbed back toward JPY 157 after two rounds of suspected BOJ intervention (April 30 and May 6) carved the pair from nearly 160.70 to the 155 handle. Options worth $620 million at 157 expire today, and the pair is pressing that level. The Fed’s custody holdings of US Treasuries rose for a third week through May 6, which some analysts watch as a proxy for intervention. The increase suggests that if the BOJ sold dollars, it likely did so by drawing on reserves outside its Treasury portfolio, not by dumping securities held in custody. More telling is the failure of intervention to sustainably reverse the trend. The yen remains anchored by a wide rate differential: even with no Fed hikes left, the BOJ’s policy rate is near zero. For dollar-yen to break lower, either US yields must fall much further, or the BOJ must signal a cycle of hikes. Neither condition is in place.

Sterling shrugged off Labour’s heavy losses in local elections and calls for Prime Minister Starmer to step down. Cable pushed to $1.3625, and UK gilts rallied over 5 bp, making them the best-performing bond market of the session. The silence from forex and rates is instructive: political noise that does not alter fiscal credibility or the Bank of England’s rate path gets ignored. Options for GBP 1.35 billion at $1.3600 expire today, which could anchor price action into the fix. The bias remains with the dollar’s trajectory, not domestic politics.

Commodity FX and EM: Loonie Jobs, Peso Cut, Yuan Low

Both the US and Canada release April employment figures, and the divergence between their labor markets is stark.

The Bank of Canada faces a deteriorating labor backdrop even before tariffs and trade uncertainty hit. Friday’s Canadian jobs data could push the pair above the CAD 1.3715 high from last week if the report disappoints. USDCAD has already found support near the 61.8% retracement at CAD 1.3650, and a run toward that high would align with the underlying rate divergence.

The Australian dollar hovered near $0.7200, where A$880 million in options expire. A daily close above that level would mark the fifth weekly gain in six weeks, but yesterday’s North American session squashed a move toward $0.7265, the best level since July 2022. Profit-taking remains the near-term risk, especially with the US jobs report looming.

The Mexican peso whipsawed after the central bank cut the overnight rate by 25 bp to 6.50%. Governor Victoria Rodríguez Ceja flagged a debate next month on one final cut, suggesting an end to the easing cycle. The dollar spiked to MXN 17.3125 before retreating to MXN 17.2250. Meanwhile, the offshore yuan touched a three-year low near CNH 6.7960 before settling above 6.80, reflecting broad dollar weakness and a PBOC fix that leaned slightly weaker.

The Payrolls and Sentiment Gauntlet

The April jobs report and the University of Michigan consumer survey are the final hurdles for dollar positioning this week. The US labor market remains resilient: in the first quarter, employers added 204k jobs overall and 237k in the private sector, compared with just 60k and 30k, respectively, in Q1 2025. The unemployment rate was 4.3% in March, below the Fed’s median year-end forecast of 4.4%. Average hourly earnings growth moderated to 3.5% year-over-year from 4.2% a year earlier, giving the Fed room to stay on hold.

The consumer survey, however, is likely to darken. Rising gasoline and food prices, combined with war anxiety, are expected to push the one-year inflation expectation above April’s 4.7%. The 5–10-year outlook sat at 3.5% last month. If the preliminary May reading jumps even modestly, it would complicate a narrative that is currently all about disinflation and a dovish Fed.

For dollar bears, the path of least resistance remains lower as long as the rate-hike premium stays compressed and equities hold up. But a surprise payrolls beat, particularly if accompanied by sticky wage growth, might force a sharp repricing that tests the conviction behind Friday’s broad greenback selling. The options boards, heavy with expiries at critical levels, suggest many orders will be cleared today, leaving fresh ground for the start of next week.