Euro climbs as weak US jobs cut Fed hike odds to 44%

Weak US payrolls have repriced Fed hike expectations, lifting EUR/USD toward 1.16 as Danske Bank joins the bullish camp.

The euro gained 0.29% to near $1.1560 Friday as a shock US jobs report showing 23,000 job losses in July cut market pricing for a September Fed hike to 44%, from 55% before the data. The dollar index dropped to 99.50, testing its 200-day moving average, while two-year Treasury yields fell 8 basis points to about 4.20% and the 10-year yield slipped to roughly 4.65%.

"The unemployment rate fell to 4.1% from 4.2%, but not for good reasons," ING said. "It was primarily because of a further drop in the participation rate — unemployed people leaving the workforce entirely."

The report showed the previous two months revised down by a combined 103,000 jobs, while wage growth eased to 3.2% year-on-year. The participation rate fell to 61.4%, the lowest in more than five years. Sector details were equally soft: local government education shed 50,000 jobs, retail lost 19,000, and healthcare added just 22,000 — below its average monthly gain over the past year. Average hourly earnings rose only two cents. Fed funds futures now price just 10 basis points of a potential 25 basis point hike at the September 16 meeting.

Rate Differential Narrows as ECB Holds Hawkish Line

The repricing matters because it narrows the dollar's yield advantage over the euro. The ECB raised its deposit rate to 2.25% in June and held in July, with markets still pricing a further hike in September. If the Fed stays on hold while the ECB tightens, the rate differential compresses further, supporting EUR/USD.

ING targets 1.16 on a one-month view and 1.18 by year-end, a forecast the weak jobs data makes easier to defend. Danske Bank echoed the bullish stance, saying the Fed repricing lifts the euro against the dollar. EUR/USD has risen 1.37% over the past month, recovering from below 1.1370 in late July. A clean push through the recent 1.1580 area would put 1.16 back in sight.

The Fed has held rates at 3.50%-3.75% since its July meeting, where three officials voted for an immediate hike. ING said the figures "support our call for a prolonged pause from the Federal Reserve," with disinflation expected to continue well into 2027. The bank noted that if participation had held steady, the US unemployment rate would exceed 5%, a level that would make any September hike untenable.

CPI Report on Wednesday Is the Next Test

The next test comes Wednesday, when July CPI is released. Economists expect headline inflation to slow to 3.4% from 3.5%, with core easing to 2.5% from 2.6%. The Cleveland Fed's nowcast model points to 3.42% headline and 2.52% core. If inflation confirms the disinflation trend, the case for a September hold strengthens and EUR/USD could extend toward 1.1780. A hotter print, however, would revive hike expectations and cap the euro's recovery.

Energy prices remain the wildcard. Brent crude closed Friday at $85.29 per barrel, with volatility driven by unresolved US-Iran tensions. Energy inflation stood at 15.5% in June, though easing oil and gasoline prices helped moderate the reading. Signs of a potential shipping agreement between Iran and Oman emerged over the weekend, but Tehran said the deal may not automatically reopen the Strait of Hormuz, keeping oil prices unpredictable.

Beyond Wednesday's CPI, the Fed has another payroll report and two inflation releases before its September 16 decision, plus the Jackson Hole symposium later this month. ING expects the Fed to remain on hold well into 2027, keeping its dollar view soft. "For now, our call remains one of USD weakness in the next couple of months as we expect the Fed to stay on hold this year," the bank said.

This article is for informational purposes only and does not constitute investment advice.