EUR/USD Breaks Channel as Rate Cut Bets Ramp Up… Potential 370 Pip Rally Incoming?

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Most Read: GBP/USD Forecast: Cable Recovers but the Outlook Remains Murky. WIll NFP Data Serve as a Catalyst?

EUR/USD finally got the catalyst it needed to break the channel that price had been holding since the back end of July.

August 22 and September 1 both saw EUR/USD attempt to break beyond the channel but the move was met with swift selling pressure. This led many to believe that a catalyst may be needed to inspire a breakout as the pair saw a lot of choppy price action over the last month.

Jobs Report Weighs on the US Dollar

Non farm payrolls rose only about 22k while economists guessed near 75k. There were about 29k upward revisions for the last two months, yet even after adding them the total still looks like a small miss.

Unemployment edged up to 4.3 percent from 4.2 percent, which was kind of expected, but under employment, workers who want more hours climbed faster to 8.1 percent from 7.9 percent.

Hours worked fell roughly to 34.2 per week and wage growth slipped to 3.7 percent year over year instead of 3.9 percent, so softness appears everywhere.

Read more: US Non-Farm Payrolls finally release and they miss! 22K vs 75K consensus, Canadian Jobs data regress (-65K vs +10K)

Over the last two‑and‑a‑half years almost nine‑tenths of new jobs came from just three fields: government, private health and education, plus leisure‑hospitality.

If you strip those three out, payroll numbers have actually slipped for four straight months, hinting at problems in sectors usually called growth engines of the U.S. economy.

As things stand, serious concerns are starting to be raised by consumers around the health of the US economy. Consumers expect the labor market situation to deteriorate rather than get any better.

According to recent University of Michigan data, 62% of Americans think unemployment will rise over the next 12 months while only 13% think it will fall. This gives a net reading of 49% who expect unemployment to rise. We’ve only seen worse readings on four occasions in the past 50 or so years, as seen in the chart below.

Source: ING Think

Implications for the FED

Market participants have for the first time begun pricing in the probability of a 50 bps rate cut in September. This has been one of the biggest reasons for the US Dollar weakness we are seeing today.

According to LSEG data at the time of writing, markets were pricing in around 11% probability of a 50 bps cut at the September meeting. This has in part led to a slide in the US Dollar and seen Gold prices attract haven bids.

Source: LSEG

The uncertainties and the potential for a recession are definitely rising and this could also be why haven demand has remained strong.

The Fed’s Beige Book released this week read grim, and that helped spark a 50 bp cut last year. Yet the current makeup of the Fed looks cautious, and the shadow of tariffs and inflation adds uncertainty. It is likely that a majority for another 50 bps cut won’t form, though two or three members could vote for it.

Policy Divergence to Aid the Euro Through December 2025

The Euro may also gain an advantage as policy divergence comes into play. Let me explain, the ECB may still cut rates once more this year but that is about it.

The Fed are noow scheduled for two rate cuts and potentially if the job market worsens, three rate cuts this year if not an early one in 2026. This sets the Euro up handsomely to gain further ground against the greenback.

The Eruo Area economy is grappling with its own challenges though so the narrative could change. For now though the outlook does favor further gains for the Euro against the Greenback.

Looking Ahead

Market participants will now turn their attention to a slew of high impact data releases next week from the US.

PPI, CPI and University of Michigan data will all be released and could have a further impact on rate cut expectations. A softer than expected CPI and PPI print could see the bets for a 50 bps rate cut in September rise and further bolster the Euro.

Also keep an eye out for comments from Federal Reserve policymakers and how they receive and interpret today's data release.

For all market-moving economic releases and events, see the MarketPulse Economic Calendar.

Technical Analysis - EUR/USD

EUR/USD is breaking the channel on the four hour chart which has been in play since late July.

We have seen two attempts to break the channel fail and this time the NFP data may be the catalyst.

A four-hour candle close above the channel has occurred and if the pattern for channel breaks is to conclude it could result in a potential 370 pip upside rally.

This could put EUR/USD around the 1.2100 mark should it come to fruition.

Now there are a host of fundamental factors discussed above which support the move. There is also a few that do not, so bear that in mind moving forward.

Looking at the period-14 RSI and it is currently in extremely overbought territory. This could lead to a short-term pullback before the bulls continue to move higher.

Looking at the four-hour chart and the swing low at 1.1631 will hold the key for me. A four-hour candle break and close below this level would have me reevaluating the pair.

As long as this level remains support, the potential for a rally remains in play.

Source: TradingView.com (click to enlarge)

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