The US dollar dropped significantly after a weaker-than-expected Non-Farm Payrolls (NFP) report. This has led to higher expectations for Federal Reserve interest rate cuts. The market now predicts three cuts by the end of the year, totaling 70 basis points. If the Consumer Price Index (CPI) report is also soft, we could see a 50 basis point cut in September. Overall, the dollar is trending downward unless strong economic data emerges to change this. For the euro, recent attention has shifted to the French political landscape, with a confidence vote expected to cause some market changes. The European Central Bank (ECB) members are currently neutral on rate cuts, waiting for significantly negative data to consider any further easing. By year-end, only 8 basis points are anticipated, reaching 19 basis points by the end of 2026. This suggests we might be nearing the end of the easing cycle.

Technical Analysis

From a technical perspective, the EURUSD is testing a breakout from its monthly range on the 4-hour chart, with a potential rally if it breaks upwards. On the 1-hour chart, a recent surge was followed by a pullback. Buyers are looking at support at 1.1680, while sellers are targeting support at 1.16. Key upcoming reports include the US Producer Price Index (PPI) on Wednesday, the ECB rate decision and the US CPI report on Thursday, and the University of Michigan Consumer Sentiment report on Friday. The US dollar is under pressure after last Friday’s NFP report showed only 145,000 jobs were added in August, falling short of expectations. This led to a full pricing of three Federal Reserve rate cuts by year-end. Futures markets now indicate over an 80% chance of the first cut happening at the September Federal Open Markets Committee (FOMC) meeting. All attention is on this Thursday’s US Consumer Price Index (CPI) report, which will be crucial. A weak inflation figure, especially if the core year-over-year rate drops below 3.0%, would likely lead to a dovish Fed. This could push the EURUSD above its month-long resistance, starting a new upward trend. In Europe, the situation is different, which creates a clear policy divergence that supports the euro. The ECB has indicated it may not cut rates any further for now, with recent Eurozone inflation data being stickier than expected. This difference between a dovish Fed and a neutral ECB is driving the potential EURUSD breakout.

Options and Strategies

For traders expecting an upward breakout, buying EURUSD call options just above the current range seems wise. This allows for leveraged betting on a rally following weak US data, with risk limited to the premium paid for the option. The goal would be to capture a quick move towards new cycle highs. If we feel the market is ahead of itself, selling a call credit spread with a ceiling above the range offers another option. This strategy benefits from time decay and a failure of the EURUSD to break out, which might happen if the CPI report is stronger than expected. This is a bet that the pair will stay within the range or fall back to the 1.1600 support level. Caution is necessary, as we recall a similar situation from early 2024 when the market priced in Fed cuts that did not materialize quickly. A surprisingly strong CPI number this week could lead to a sharp reversal, impacting bearish dollar positions. Therefore, managing risk around this week’s data releases is essential. Create your live VT Markets account and start trading now.

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