EUR/USD steadied below 1.1600 and drew modest buying in Thursday’s Asian session, trimming part of the prior day’s drop to a weekly low. Upside momentum remained constrained by uncertainty over US-Iran talks and positioning ahead of Friday’s US Nonfarm Payrolls (NFP) release. A Lebanon-Israel ceasefire agreed after talks in Washington reduced immediate regional escalation risk, tempering demand for the safe-haven US Dollar (USD) and offering the pair some support. Expectations for a 25 basis point ECB rate rise later this month also underpinned the euro.
Geopolitical risk persisted, however, with the US military saying it repelled multiple Iranian missiles and drones launched at Kuwait and Bahrain on Tuesday, before conducting self-defence strikes on Qeshm Island; Iran then targeted US bases in Bahrain in response. The tension helped crude oil hold on to gains from the past three days, keeping inflation concerns in focus and reinforcing a hawkish bias among major central banks, including the Fed. CME Group’s FedWatch Tool showed traders pricing a 50% chance of a Fed rate hike by year-end, a backdrop that could keep the USD supported while markets await labour-market data for clearer policy direction.
Market Positioning Ahead Of US Nonfarm Payrolls
We are seeing the EUR/USD pair find some footing around the 1.0850 mark, attracting buyers after a recent dip. However, we see limited upside ahead of this Friday’s crucial U.S. Nonfarm Payrolls (NFP) report. This data will be a key signal for the Federal Reserve’s next move and is creating caution in the market.
The Euro is finding some support as recent commentary suggests the European Central Bank may pause its rate-cutting cycle later this summer. Furthermore, renewed diplomatic efforts in the Middle East have slightly eased fears of a wider conflict. This has taken some strength out of the safe-haven U.S. dollar, helping create a temporary floor for the currency pair.
Persistent Geopolitical Risks And Policy Divergence
We believe this optimism is fragile due to persistent tensions in the Strait of Hormuz, which keeps geopolitical risk at the forefront. These risks are keeping Brent crude oil prices elevated above $85 a barrel. This fuels stubborn inflation concerns that could force the Fed to maintain its restrictive policy for longer.
Consequently, investors are now pricing in a period of policy divergence, where the Fed holds rates higher for longer than other central banks. According to the latest CME FedWatch Tool data, the probability of a Fed rate cut by September has fallen to below 20%. This is a stark contrast to the 70% chance priced in just three months ago.
This outlook, combined with geopolitical unease, should continue to underpin the dollar, warranting caution against aggressive bullish bets on EUR/USD. We are advising derivative traders to reduce long exposure and consider options strategies that profit from range-bound price action or a potential downward move. A strong NFP print above the consensus of 195,000 would likely solidify the Fed’s hawkish stance and could trigger the next leg down for the pair.
