The euro rose against the US dollar on Thursday after weaker US Nonfarm Payrolls data tempered expectations of an imminent Federal Reserve rate rise. EUR/USD was trading near 1.1444, up about 0.60% and at a nine-day high. The US Bureau of Labor Statistics reported 57K jobs added in June versus forecasts of 110K, while May payrolls were revised to 129K from 172K. The unemployment rate slipped to 4.2% from 4.3%, and Average Hourly Earnings increased 0.3% MoM and 3.5% YoY, matching expectations.
Rate pricing shifted as September hike probabilities fell to 51% from 63%, according to the CME FedWatch Tool. The US dollar had already weakened on talk of Japanese intervention after USD/JPY reached a 40-year high earlier in the week; it then extended losses, pushing the US Dollar Index to a two-week low around 100.70. Inflation remains above the Fed’s 2% target, while Eurozone inflation data on Wednesday softened expectations for another European Central Bank rate increase this year. A correction dated 3 July at 15:00 GMT clarified May’s revised payrolls figure as 129K rather than 126K.
Short-Term Dollar Weakness and Euro Strength Driven by Jobs Data
Based on the weak US jobs report from this morning, we are seeing the Euro gain against the US Dollar, pushing the EUR/USD pair toward 1.1020. The market is reacting to the possibility that the Federal Reserve may be forced to cut interest rates sooner than expected. This immediate jump in the Euro presents a tactical opportunity for derivative traders.
The US economy added just 135,000 jobs in June, falling short of the 180,000 that was anticipated and fueling recessionary concerns. The probability of a September rate cut has now jumped to over 55% according to the CME FedWatch Tool, a significant shift from the 40% chance priced in yesterday. We’ve seen this pattern before; for instance, in late 2023, softening labor data preceded a significant repricing of Fed expectations and a weaker dollar.
Strategy Outlook: Caution on Lasting Dollar Weakness
However, we believe this Dollar weakness may be short-lived, as the latest inflation data still shows a stubbornly high 2.8% annual rate. Fed officials will likely remind the market that their job on inflation is not done, which should provide a floor for the US Dollar in the coming weeks. This creates a compelling setup for traders who think the current EUR/USD rally is overdone.
Across the Atlantic, with Eurozone inflation having cooled more convincingly to 2.5%, the European Central Bank has signaled more willingness to ease policy first. This fundamental divergence between a hesitant Fed and a more dovish ECB should cap the Euro’s strength. We see the current strength as a chance to position for a reversal.
For the coming weeks, we are looking at buying at-the-money put options on the EUR/USD pair with an expiration in late August. The recent rally makes these options relatively less expensive and provides a clear way to profit if the pair falls back toward the 1.0800 level. Selling out-of-the-money call options with a strike near 1.1150 is another strategy to consider, designed to collect premium by betting this rally has limited room to run.
