The US dollar experienced a sell-off across the board following a softer-than-expected NFP report, leading to increased expectations for Federal Reserve rate cuts. The market anticipates three rate cuts by year-end, totalling 70 basis points, with a potential 50 basis point cut in September if a soft CPI report confirms dovish conditions. Despite the overall range, the trend remains downward for the dollar, unless strong economic data emerge to reverse it.
For the EUR, the recent focus has been on the French political scene with the anticipated confidence vote, possibly causing temporary market fluctuations. ECB members retain a neutral stance on rate cuts, awaiting notably negative data to consider further easing. Currently, only 8 basis points are expected by year-end, reaching 19 basis points by the end of 2026, signifying a potential end to the easing cycle.
Technical Analysis
In technical terms, the EURUSD is testing a breakout from its month-long range on the 4-hour chart, with potential for a rally upon an upward breakout. On the 1-hour chart, a recent upward spike was followed by a pullback, with buyers eyeing support at 1.1680 and sellers targeting support at 1.16. Upcoming data include the US PPI report on Wednesday, the ECB rate decision and US CPI report on Thursday, and the University of Michigan Consumer Sentiment report on Friday.
The US dollar is under pressure following last Friday’s soft Non-Farm Payrolls report, which showed the economy added only 145,000 jobs in August, missing forecasts. This has led us to fully price in three Federal Reserve rate cuts by the end of this year. We can see through futures markets that the probability of a first cut coming at the September FOMC meeting is now over 80%.
All eyes are now on this Thursday’s US Consumer Price Index (CPI) report, which will be the deciding factor. A weak inflation reading, especially if the core year-over-year figure dips below the stubborn 3.0% level, would essentially guarantee a dovish Fed. This would be the catalyst needed to push EURUSD above its month-long resistance and trigger a new upward trend.
Meanwhile, the situation in Europe is quite different, creating a clear policy divergence that supports the euro. The European Central Bank has signaled it is likely done cutting rates for now, with recent inflation data for the Eurozone proving stickier than anticipated. This contrast between a dovish Fed and a neutral ECB is the fundamental driver behind the potential EURUSD breakout.
Options and Strategies
For traders anticipating this upside breakout, buying EURUSD call options with a strike price just above the current range seems like a good strategy. This approach offers a leveraged bet on a rally following weak US data, with the risk limited to the premium paid for the option. We would be looking to capture a quick move towards new cycle highs.
However, if we believe the market has gotten ahead of itself, selling a call credit spread with a ceiling above the range offers an alternative. This position profits from time decay and a failure of the EURUSD to break out, which could happen if the CPI report comes in hotter than expected. This is a bet that the pair will remain range-bound or fall back toward the 1.1600 support level.
We should be cautious, as we remember a similar situation back in early 2024 when the market aggressively priced in Fed cuts that failed to materialize quickly. A surprisingly strong CPI number this week could cause a sharp reversal, punishing bearish dollar positions. Therefore, managing risk around this week’s data releases is critical.
