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The euro is holding steady near $1.16 against the US dollar as the currency market braces for one of its biggest tests this week: the US jobs report on Friday. This comes after Federal Reserve Chairman Kevin Warsh injected some strength into the dollar with a more hawkish speech at the Jackson Hole symposium. Now, investors are focused on the labor market data to see if warnings of another potential interest rate hike are based on genuine economic strength.
The dollar regains confidence, while the euro faces renewed pressure.
The EUR/USD pair traded near $1.16 on Monday, after the dollar rose to its highest level in nearly two weeks, compared to levels close to $1.18 last week. Despite the euro’s recent waning momentum, the European currency remains on track for its second consecutive monthly gain . However, the picture shifted somewhat following comments by Warsh at Jackson Hole, which revived the possibility of tighter US monetary policy.
Warsh noted that the Federal Reserve may need to continue raising interest rates if inflation does not move convincingly toward the central bank’s 2% target.
These remarks prompted markets to reprice their expectations for the September meeting. Futures contracts now indicate a probability of nearly 57% for a US interest rate hike in September , compared to just 35% before Warsh’s speech.
Meanwhile, the yield on two-year US Treasury bonds rose to around 4.33% , making dollar-denominated assets more attractive to investors. This is the euro’s main problem at the moment. European economic data may improve, but the single currency faces competition from the dollar at a time when the US Federal Reserve is again hinting at the possibility of offering investors higher returns through higher interest rates.
US jobs report: Data that could determine the direction of the euro
But the Federal Reserve’s statements alone won’t be enough to determine the market’s next direction. The real test will come on Friday with the release of the US jobs report for August . Markets expect the US economy to have added around 50,000 new jobs , with the unemployment rate remaining near 4.1% . This data follows a disappointing July, when the US economy lost approximately 23,000 jobs .
If August’s data comes in stronger than expected, particularly if it shows robust job growth, wage growth, and increased working hours, expectations of a September interest rate hike could receive a boost. In this scenario, the euro could come under further pressure, with the EUR/USD pair potentially falling below $1.16.
If labor market data comes in weak again, markets may begin to question the Federal Reserve’s ability to raise interest rates in September. This would put pressure on US Treasury yields, weaken the dollar’s appeal, and pave the way for the euro to return to its recent highs. But investors won’t be waiting on the jobs report alone. US job openings data will be released on Tuesday, along with a host of other indicators throughout the week, including private-sector employment figures, unemployment claims, and adjusted productivity data. These will be important because they will help markets get a clearer picture of the strength of the US labor market before the more significant report is released on Friday.
European inflation enters the fray
Meanwhile, Europe will not be a mere spectator to the dollar’s movements. Eurozone inflation data, due on Tuesday, is expected to show the annual inflation rate rising to around 3.3% . A higher-than-expected reading could bolster investor bets that the European Central Bank will raise interest rates in September, potentially supporting the euro and mitigating the impact of the Federal Reserve’s stronger dollar. Markets will also be watching the final Purchasing Managers’ Index (PMI) results for the manufacturing and services sectors, seeking evidence that the recent improvement in European economic activity is not simply a temporary phenomenon.
The preliminary reading for August showed that business activity in the eurozone expanded at its fastest pace since the beginning of the year, driven by improved industrial orders and a return to export growth. Therefore, the outlook for the euro will depend on a two-pronged battle between the US and European economies : the strength of the US labor market and inflation on the one hand, and inflation and economic activity in the eurozone on the other.
The $1.16 level is under the traders’ watchful eye.
Technically, the $1.1600 level remains the key turning point for the EUR/USD pair in the near term. A break below this level would likely lead to support near $1.1550 and then $1.1500 . On the upside, major resistance lies in the $1.1660-$1.1700 range. Therefore, Friday’s US jobs report could be the deciding factor in whether the pair will start a new upward trend or enter a deeper correction. If the US jobs data is weak, coupled with continued high European inflation, the euro could find the necessary momentum to break through resistance levels and resume its upward movement.
If the US jobs data comes in strong, euro buyers will have to contend with two factors simultaneously: the Federal Reserve and the US bond market , which could make it more difficult for the euro to regain the $1.17 level.
Overall, the euro begins September in a precarious position. While the European currency still retains some of the momentum that propelled it to a second consecutive monthly gain, the resurgence of the dollar and rising US Treasury yields have reshaped the market dynamics. Now, markets await clear economic indicators to determine which narrative will prevail: Is the US economy robust enough to withstand further monetary tightening, or will a weak labor market force investors to abandon their bets on interest rate hikes? The answer may come on Friday, and it could determine not only the euro’s trajectory against the dollar but also the course of currency and bond markets in the coming weeks.
