Dollar Hits 2-Month High: U.S. Employment Results Revive Fed Rate Hike Scenario

A Jobs Report That Reshuffles Monetary Cards

The surprise is significant: with 172,000 net job creations in May, the US labor market nearly doubles the consensus expectations, which estimated around 85,000 jobs. The unemployment rate remains steady at 4.3%, a sign that the job market is absorbing the slowdown without any apparent disruption.

The reaction of monetary expectations was immediate. According to the CME's FedWatch tool, the implied probability of a Fed rate hike by December 2026 jumped from around 45% a week ago to over 70% after the figures were released. This shift reflects the growing conviction that the combination of robust employment and imported inflationary pressures via energy leaves little room for short-term monetary easing.

For investors, the signal is twofold: expectations are hardening for the trajectory of US interest rates, and the monetary policy gap with other major central banks is widening, which is the primary driver of movements in the exchange rate.

Euro at 1.15, Yen Under Pressure: Currency Hierarchy Reshuffles

In the foreign exchange market, the EUR/USD is hovering around 1.15, marking a two-month low for the euro. Meanwhile, the yen is trading near 160.3 against the dollar, erasing gains from Tokyo's intervention that occurred just over a month ago.

This return to a potential intervention zone for the Bank of Japan comes as the market begins to factor in the possibility of Japanese monetary tightening if the energy surge is confirmed. The situation is particularly delicate for the eurozone, which was already facing weakness before the oil shock, as detailed in the national accounts from the first quarter in our analysis on the eurozone's GDP decline offset by the Iranian oil shock.

The quoted levels correspond to early session observations and remain highly subject to intraday fluctuations in the current context of geopolitical volatility. However, the underlying trend, characterized by a dollar supported by a widening interest rate differential, is now shaping international operators' arbitrage decisions.

Energy Shock and Global Financial Conditions: A Mix to Watch

The second driver of the movement lies in the oil risk premium. Brent is hovering around $97 a barrel, up about 2% following new Israeli strikes on Lebanon and ongoing concerns over the Strait of Hormuz. This pressure on prices directly fuels the scenario of imported inflation that economists cite to justify the expected tightening by the Fed.

The sequence is mechanical: high energy prices rekindle inflationary pressures, which keeps long-term rates under tension and supports the dollar. For risky assets and emerging market currencies, the equation becomes more complicated, with the Australian and New Zealand dollars slipping to two-month lows, and the British pound hitting a three-week low around $1.33.

The scenario of a prolonged strong dollar, combined with restrictive global financial conditions, is now becoming the dominant working hypothesis for traders. As a reminder, oil prices had already begun to retreat following the announcement of a conditional ceasefire between Israel and Lebanon, illustrating just how much the trajectory of markets remains dependent on the diplomatic developments in the Middle Eastern situation.