EUR/USD rose 0.43% to around 1.1570–1.1574 after US labour data surprised to the downside and sent the US Dollar lower. Nonfarm Payrolls fell by 23K in July versus forecasts for an 80K increase, while prior months were marked down: June was revised to 20K from 57K and May to 63K from 129K, a combined negative revision of 103K. Even so, the unemployment rate edged down to 4.1% from 4.2%, participation slipped to 61.4% from 61.5%, and annual average hourly earnings growth cooled to 3.2% from a downwardly revised 3.4%.
Rate expectations shifted quickly. CME FedWatch put the probability of a 25-basis-point Fed hike in September at 44%, down from 55% the previous day and 67% a week earlier, though markets still price a high chance of one 25-basis-point move by year-end. In Europe, Germany’s industrial production rose 0.2% in June versus expectations of 0.1%, but slowed from 0.7% in May, and the trade surplus narrowed to €15.4B. Technically, the pair held above the 100-period SMA at 1.1530 and the 200-period SMA at 1.1494, with RSI (14) near 80; support levels include 1.1560, 1.1507, 1.1500 and 1.1494.
Short-Term Pullback and Trading Strategies
We should prepare for a brief pullback in the EUR/USD pair before committing to longer-term bullish positions. With the spot rate jumping to 1.1574 and the Relative Strength Index (RSI) hitting an overbought level of 80, the currency pair is ripe for short-term consolidation. To exploit this, we can buy short-term put options or set up bear put spreads, targeting a temporary dip back toward the 100-period simple moving average at 1.1530.
Once this initial overbought condition cools down, we expect the broader upward momentum to resume as the US Dollar faces sustained pressure. This rally has pushed the Euro to heights not seen since early 2022, marking a major technical breakout above the crucial 1.1500 barrier. We recommend buying EUR/USD futures on dips near the 1.1500 to 1.1530 support zone to capture the next leg upward in the coming weeks.
Evolving Rate Expectations and Volatility Plays
In the interest rate markets, the dramatic shift in Fed policy expectations demands immediate adjustments to our derivatives portfolios. With September rate hike odds plunging from 55% to just 44% following the loss of 23K jobs, we should go long on autumn SOFR futures to capitalize on falling yield expectations. Historically, massive employment misses of this magnitude—with a 103K combined downward revision—forcibly drag down Treasury yields, meaning we should also position for a drop in the 2-year US yield.
Given the stark divergence between a cooling US labor market and a highly cautious European Central Bank, we anticipate a sharp rise in currency volatility. Derivative traders can buy EUR/USD straddles to profit from expanding implied volatility as the market recalibrates its global interest rate assumptions. This volatility will likely intensify over the coming weeks as we await upcoming inflation data to confirm if the Fed must completely abandon its tightening bias.
