The Greenback Tailwind Is Steadily Thinning as Fed Hike Bets Recede

U.S. dollar weakness is being driven less by the charts than by a rapid rethink of where Federal Reserve policy goes next. After EUR/USD spent five straight weeks pinned to multi-year support before rebounding, the more telling change has been in interest rate expectations, where the case for another Federal Reserve rate hike has cooled sharply. That repricing has pulled momentum out of a currency that had been riding a firmer rate outlook, leaving the U.S. dollar's next move hostage to a heavy stretch of labor market data. The question underneath the price action is whether the dollar's uptrend still has enough behind it to hold.

Michael Boutros is a Senior Market Analyst at FOREX.com who has spent close to two decades on foreign exchange trade desks and covers currencies, commodities and equity indices through a structured, multi-time-frame technical approach. His work follows the major currency pairs and the macro calendar around them, which places EUR/USD and the U.S. dollar's response to Federal Reserve policy squarely within the markets he tracks.

Key Themes

• EUR/USD rebounded off multi-year support after testing the same level for five consecutive weeks.
• Market-implied odds of a September Federal Reserve rate hike have fallen from around four in five toward a coin flip.
• Nonfarm payrolls, ADP employment and eurozone retail sales headline a data stretch that could set the U.S. dollar's direction.

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U.S. Dollar Loses Ground as Fed Rate-Hike Bets Fade

"That shift has dramatically changed and taken some of the wind out of the dollar sails", Boutros said, pointing to how quickly expectations for another Federal Reserve rate hike have unwound. Ahead of the last rate decision markets leaned heavily toward a hike, at roughly four in five odds, and that conviction has since eased toward a near coin flip for the September meeting. As a result, the U.S. dollar has lost the interest rate support that underpinned its earlier strength, giving EUR/USD room to recover off multi-year support. For active traders, it reframes the pair as a story about the Federal Reserve's path rather than the chart alone.

Nonfarm Payrolls Set to Steer the U.S. Dollar's Next Move

The U.S. dollar's direction now hinges on a dense stretch of labor market data, headlined by the nonfarm payrolls report alongside the ADP employment report and eurozone retail sales. A soft reading is the pivot the market is watching, and according to Boutros, the key risk is whether "you get a weaker print, does that curb the Fed's appetite for further rate hikes moving ahead". At the last rate decision the Federal Reserve reiterated that both growth and the labor market remained on solid footing, so a clear miss would cut against that message and weigh on the U.S. dollar. Conversely, a firm payrolls number could revive rate-hike expectations and hand the currency back some of its lost momentum. That two-sided setup is why the data, not the chart, may decide the next leg.

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--- Written by Gus Farrow, Senior Manager, StoneX Media

--- Expert: Michael Boutros, FOREX.com Senior Market Analyst