Fears about the looming debt crisis remain, even in the midst of expectations of a Fed rate cut. However, as soon as the US labor market showed new signs of weakness, EURUSD bears retreated. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Fed may not be able to save the debt market by lowering interest rates.
- Treasury yields are affected by inflation fears.
- The weakness of the labor market has dealt a blow to the US dollar.
- Long trades can be opened if the EURUSD pair breaks above 1.1685.
Weekly Fundamental Forecast for Euro
The revival of investor interest in the greenback can be linked to the idea that the US will be less affected by the looming global debt market crisis than Europe. At the same time, the Fed can hardly provide any support by lowering interest rates. When the central bank began its cycle of monetary expansion in September 2024, the yield on 30-year Treasuries was 4%. At the start of autumn, it jumped to 5%. However, as soon as new data confirmed the weakness of the labor market, investors immediately returned to buying the EURUSD pair.
30-Year Bond Yields
Source: Wall Street Journal.
In an era of ultra-low and often zero yields, governments accumulated debt. However, since the global economic crisis, global monetary tightening has quadrupled the cost of servicing that debt in the US. This budget segment has now surpassed defense spending.
Meanwhile, Donald Trump is outraged and demanding that the Fed lower interest rates. However, as the recent rise in 30-year bond yields shows, fiscal dominance may not be sufficient to mitigate economic hurdles. Treasury rates are influenced by expectations of a resumption of the monetary expansion cycle, as well as by forecasts of accelerating consumer prices.
In this regard, the unexpected decline in US job openings in July from 7.4 million to 7.2 million was a lifeline for EURUSD bulls. In September, investor sentiment indicated a 99% likelihood of a decrease in the federal funds rate. As a result, the yield on 30-year Treasury bonds declined due to expectations that the fragile labor market would slow inflation. Additionally, the US dollar retreated.
US JOLTS Job Openings
Source: Wall Street Journal.
The disappointing job vacancies report has led to a heightened likelihood that the Fed will not object to a September rate reduction. St. Louis Fed President Alberto Musalem stated that the labor market appeared to be in a healthy state. However, he also noted a growing concern regarding the potential acceleration of inflation due to tariffs. However, he disregarded recent employment statistics. This has led to heightened concerns among officials about the potential economic downturn.
Therefore, if the Fed is unable to stabilize the debt market, macroeconomic statistics will likely assume that role. In this context, investors’ close attention to August’s non-farm payrolls is reasonable. Morgan Stanley has stated that only a sudden increase in the indicator to 225,000 or higher will prevent the central bank from lowering rates. Otherwise, the Fed will lower it once a quarter and bring it to 2.75%–3% in 2026. According to recent reports, Crédit Agricole has noted a 75 basis point increase to the ECB’s deposit rate by September of next year.
Weekly EURUSD Trading Plan
Divergence in monetary policy keeps the upward trend for the EURUSD pair intact. Long trades opened on pullbacks still bear fruit. Therefore, more long positions can be opened on a breakout of 1.1685.
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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