Despite the decline in US employment in July, the EUR/USD rally was short-lived. The drop in the unemployment rate to 4.1% and Iran’s excessive demands allowed bears to recoup some of their losses. Let’s discuss this topic and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The US labor market was a major disappointment.
- The US administration has resumed pressuring the Fed.
- The risks of an escalation of the conflict with Iran are growing.
- Geopolitical factors will provide an opportunity to increase short positions on the EUR/USD pair.
Weekly Fundamental Forecast for Dollar
The truth is hard to swallow: the US labor market is just as weak as it was in late 2025, when the Fed cut interest rates three times. How can monetary tightening be on the agenda when employment has grown by an average of just 44,000 jobs per month over the past six months? In July, employment actually fell by 23,000. Combined with downward revisions to the May and June figures, the data delivered a genuine shock to financial markets. Against this backdrop, the EUR/USD pair surged to its highest level since June 17, when Kevin Warsh caught markets off guard with his hawkish rhetoric.
US Nonfarm Payrolls
Source: Wall Street Journal.
The market’s perception of the Fed chair has changed significantly following the announcement of his strategy, which relies on higher Treasury yields as a means of tightening monetary policy. At the same time, the Treasury Department is seeking to push those very yields lower. Kevin Warsh is advocating for a reduction in the Fed’s balance sheet, while the Treasury is not ruling out expanding its own balance sheet to facilitate currency interventions.
These contradictions, combined with reports of Donald Trump’s regular communication with his appointee and the US administration’s renewed pressure on the Fed, including further attempts to remove Lisa Cook, are raising serious concerns about the central bank’s independence. As a result, speculative long positions in the US dollar are coming under increasing pressure.
Speculative Positions on US Dollar
Source: Bloomberg.
Especially since the disappointing labor market report has likely tempered the FOMC hawks’ appetite for further rate hikes. The futures market raised the probability of a September rate hike from 33% to 53%, dealing another heavy blow to the greenback.
Nevertheless, EUR/USD bears managed to regain some ground. The labor market data remain mixed. While employment is growing so slowly that it increasingly resembles a recessionary environment, the unemployment rate continues to decline. In July, it fell to 4.1%. This divergence gives the Fed an opportunity to do exactly what it has repeatedly said it would do: keep its focus on inflation. As a result, the July CPI report could trigger just as much volatility in financial markets as the sharp drop in nonfarm payrolls.
Iran’s exorbitant demands are also supporting the US dollar. Tehran appears to have realized that Donald Trump is eager to extricate the United States from the Middle East conflict amid falling approval ratings for the Republicans and is now testing the US president’s patience. Iran is demanding billions of dollars in compensation for what it describes as a violation of the June agreement, the withdrawal of US troops from the region, and the reopening of the Strait of Hormuz. Taken together, these demands point to a potentially imminent escalation of tensions.
Weekly Trading Plan for EUR/USD
While the Middle East remains mired in turmoil, the US dollar still has room to recover. The EUR/USD pair returned to the 1.1500–1.1565 range, and the previous trading strategy has played out as expected. A further escalation in geopolitical risks would create an opportunity to increase short positions. Otherwise, the pair is likely to consolidate within the 1.1540–1.1600 range until the release of the latest inflation data.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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