A sharp drop in the probability of the Fed tightening monetary policy in September—from 70% to 50%—has sent the EUR/USD soaring. What impact will the US August jobs report have on the pair? Let’s discuss the potential scenarios and build a trading plan.
The article covers the following subjects:
Major Takeaways
- The market remains uncertain about a Fed rate hike.
- Falling Treasury yields have weighed on the US dollar.
- The upcoming employment data could determine the greenback’s next move.
- Short positions opened near 1.1635 can be increased amid weak NFP data.
Daily Fundamental Forecast for Dollar
The EUR/USD roller coaster is picking up speed. While Kevin Warsh’s remarks at Jackson Hole pushed the odds of a Fed rate hike in September to 70%, comments from other FOMC officials have since brought those odds back down to roughly 50%. As rate-hike expectations have faded, Treasury yields and the US dollar have also come under heavy pressure. Now, all eyes are on the US employment data, which could determine the greenback’s next major move.
Market Expectations for US Interest Rate
Source: Bloomberg.
You couldn’t ask for a better illustration of how dependent the Fed’s policy decisions are on incoming economic data. Christopher Waller appeared to throw down the gauntlet to Kevin Warsh, arguing that players perform better when they understand how the referee—in this case, the central bank—interprets the game. Yet beneath the rhetoric lies a much simpler message: for investors, the data matter far more than the Fed’s words. If inflation continues to moderate, the interest rates should be kept unchanged. If price pressures reaccelerate, further monetary tightening may be back on the table.
Investors interpreted Waller’s latest comments as dovish, especially given his previous calls for higher rates ahead of the latest inflation report. The shift in expectations triggered a sharp sell-off in Treasury yields and sent the EUR/USD sharply higher.
Now, the spotlight has turned to the August US jobs report. With the November midterm elections approaching, the employment data are acquiring an increasingly political dimension. The consensus forecast of +55,000 Nonfarm Payrolls is above the monthly average recorded during Donald Trump’s second term, while the unemployment rate has declined to 4.1% from 4.3% a year earlier. On the surface, those figures give the US administration another opportunity to highlight the labor market’s resilience.
US Labor Market Statistics
Source: Bloomberg.
In fact, employment growth is running well below the pace seen under Joe Biden and remains weak by historical standards. For comparison, the average monthly gain over the five years through 2019 was around 190,000 jobs, whereas NFP readings at current levels have historically been more typical of recessionary periods. This time, the slowdown appears to reflect Donald Trump’s restrictive immigration policies limiting labor force growth, while an aging population further reduces the supply of workers. With the labor force shrinking, the unemployment rate can remain relatively low even as job creation loses momentum.
The result is a labor market that is neither overheating nor freezing. In many ways, it is at a comfortable temperature for the Fed, allowing policymakers to place greater emphasis on inflation. That makes the August NFP report particularly important for the EUR/USD. Only a significant deviation from expectations is likely to shift the market’s rate outlook decisively—but such a surprise cannot be ruled out. Bloomberg’s forecast calls for just 12,000 additional jobs in November, while the unusually wide range of economists’ estimates highlights the uncertainty around the release and suggests we can expect a spike in volatility.
Daily Trading Plan for EUR/USD
A stronger-than-expected US jobs report would strengthen the case for adding to EUR/USDshort positions opened at 1.1635. Conversely, a weak NFP reading would support buying the pair at market levels. That said, it would be wise not to overcommit in either scenario. The initial reaction to the data could easily be followed by profit-taking and a reversal.
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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