Markets Hold Breath Ahead of US Payrolls Release

The global financial markets are in a holding pattern ahead of Friday's US July non-farm payrolls, which will provide crucial data on the state of the economy. The upcoming release is expected to have a significant impact on interest rates and the overall market sentiment.

The European Central Bank (ECB) has reiterated that inflation remains above target, with energy risks skewed to the upside. However, activity showed modest Q2 improvement supported by AI investment, inventories, and defense spending.

German factory orders surged 3.1% month-over-month in June, exceeding expectations of a 0.5% increase. On the other hand, German construction PMI slumped to 42.1, while Italian and Spanish industrial production disappointed.

The US Federal Reserve's Daly struck an unusually hawkish tone during her visit to Tokyo, warning that the Fed should be prepared to act if inflation gets out of hand. She emphasized that a drifting inflation anchor is 'really hard to get back' and that a renewal of strong price pressures would call for an aggressive rate response.

The Fed's Warsh has reportedly received repeated calls from President Trump since his appointment, seeking counsel on Iran and AI-related matters, although the nature of these conversations is unclear. The central bank backdrop provided most of the interest in the markets this week.