EUR/USD recouped part of its earlier drop on Wednesday after softer US figures and comments from Federal Reserve Chair Kevin Warsh weighed on the US Dollar. The pair traded near 1.1387, up from an intraday low of 1.1361, though it was still down about 0.30% on the session. At the ECB Forum in Sintra, Warsh said the Fed would not provide forward guidance and added that inflation risks had come down, while also reiterating the aim of restoring price stability.
US data showed ADP Employment Change at 98K in June versus forecasts of 113K and 122K in May, while the ISM Manufacturing PMI slipped to 53.3 from 54, undershooting expectations of 54. The US Dollar Index (DXY) eased to around 101.34 after a 101.59 intraday high. Markets were pricing a 67% probability of a September rate rise via the CME FedWatch Tool, with attention turning to Thursday’s Nonfarm Payrolls (NFP). Earlier, softer Eurozone inflation tempered expectations for another ECB rate hike, and ECB President Christine Lagarde said risks were more broadly balanced and the region was not in stagflation, while the ECB would take steps to contain inflation.
US Economic Data And Fed Policy Signals
The recent dip in US economic data, like the June ADP report showing only 98,000 private payrolls added, presents a trading opportunity. We see this as an early signal that the US economy is cooling faster than the Federal Reserve’s public statements suggest. This divergence between hawkish talk and weakening data creates tension that we can exploit.
The market seems to be clinging to the Fed’s tough stance on inflation, but we view the recent data as more significant. For context, the Core PCE price index, the Fed’s preferred inflation metric, fell to a 2.8% annual rate in May 2026, its lowest level in over two years. This supports the view that inflation risks have indeed come down, making the Fed’s restrictive policy less justifiable if the labor market also begins to falter.
While markets are pricing in a 67% chance of a September rate hike, we believe this is overstated. This feels similar to past cycles where the Fed maintained a hawkish tone until the data forced a pivot. We should therefore position for a potential repricing of interest rate expectations over the coming weeks, which would weigh heavily on the US Dollar.
Trading Strategy Amid NFP Uncertainty And Eurozone Risks
Given the major uncertainty heading into tomorrow’s Nonfarm Payrolls report, we are buying volatility. We are looking at purchasing near-term straddles on EUR/USD, which would profit from a significant price move in either direction following the release. An NFP number below 120,000 would likely confirm the new weakening trend and cause a sharp drop in the dollar.
On the other side of the pair, the Euro’s upside is capped by its own economic picture. Recent Eurostat data showed headline inflation in the Eurozone fell to 2.4% in June, tempering expectations for further ECB rate hikes. This means our strategy should focus more on broad US Dollar weakness rather than outright Euro strength.
Therefore, if tomorrow’s NFP report confirms the labor market is softening, we will add to our bearish dollar positions. Specifically, we will look to buy out-of-the-money EUR/USD call options with a September 2026 expiration. This gives us exposure to a potential dollar downturn through the Fed’s next key meeting.
