Weak NFP breaks the strong-dollar trade

EUR/USD

Key zone: 1.1500 - 1.1600

Buy: 1.1620 (after a confident breakout of the 1.1600 level); target 1.1750-1.1820; StopLoss 1.1550

Sell: 1.1480 (amid strong negative fundamental factors); target 1.1350-1.1300; StopLoss 1.1550

The U.S. labor market sent the dollar a very negative signal. In July, U.S. employment fell by 23,000 jobs, while data for previous months was sharply revised lower. May: from +129,000 to +63,000. June: from +57,000 to +20,000.

The overall picture is even worse than the July figure itself: over the past six months, the U.S. economy has created an average of only about 44,000 jobs per month. That is a level that is difficult to reconcile with the idea of sustained monetary tightening.

When the labor market showed comparable weakness at the end of 2025, the Fed cut rates three times. Investors now have another reason to ask: what exactly is the case for a persistently hawkish U.S. central bank built on?

Let’s recap:

The dollar took a hit, falling toward a seven-week low. The futures market sharply revised its rate expectations: the probability of policy tightening in September fell to 46% from 67% a week earlier. The probability of two rate hikes in 2026 dropped from 46% to 32%. In practice, the market has started to price out the scenario of an aggressively hawkish Fed.

• Against this backdrop, EUR/USD rose toward its highest levels since June 17. But the dollar’s problem is no longer limited to one weak NFP report. Too many contradictions are forming around the Fed.
• Kevin Warsh is promoting the idea of tightening financial conditions through higher Treasury yields while also insisting on reducing the Fed’s balance sheet. The U.S. Treasury, by contrast, is interested in lower yields, while the Treasury Department is open to expanding the balance sheet for currency interventions.
• Add Trump’s regular contacts with Warsh and the White House’s continued pressure on the Fed, including renewed efforts to remove Lisa Cook.
• For the market, the conclusion is obvious: the more political pressure and conflicting signals surround the central bank, the less attractive speculative long positions in the dollar become.

But the dollar has not lost yet: its strongest argument now lies outside U.S. macroeconomic data — geopolitics. As long as the Middle East remains a high-risk region, the dollar retains its safe-haven status. Iran is willing to discuss reopening the Strait of Hormuz but is presenting Washington with a list of demands that includes lifting sanctions, reparations, and the withdrawal of U.S. troops from the region.

A compromise still looks far from certain. The higher the risk of renewed escalation, the more safe-haven demand for the dollar can offset the pressure from weak macroeconomic data.

It is telling that after the NFP release, USD/JPY bears tried to push the pair below 157 but failed to keep it there for long. The dollar quickly returned above ¥158. The reason is simple: the interest-rate differential between the Fed and the Bank of Japan remains huge. That preserves the appeal of carry trades and supports yen selling as a funding currency.

Therefore, dollar weakness against EUR and GBP does not automatically mean a reversal in USD/JPY.

The market is now trying to digest the weak NFP report and reassess the Fed’s path. But the next major shock to rate expectations could come from inflation data. The July consumer price report could become the next major catalyst. A weak labor market gives the Fed reasons to wait. High inflation gives it reasons to do nothing. That makes the next set of macro data critically important.

So, what does this mean?

The NFP report dealt the dollar a strong blow, but not a fatal one.

The U.S. labor market now looks as if the economy has already lost a significant part of its momentum. The Fed has fewer and fewer arguments for raising rates, while political pressure on the central bank only increases doubts about the sustainability of the dollar trend.

But betting on an unconditional decline in the greenback is dangerous: geopolitics can restore safe-haven demand for the dollar at any moment.

So this is not the time to guess the direction.

For EUR/USD, the strategy targeting a return to the 1.15–1.1565 range has already played out. From here, the market once again runs into geopolitics and inflation.

If tensions in the Middle East increase, EUR sellers will gain a fundamental reason to add to short positions.

If the geopolitical premium starts to fade quickly and U.S. inflation shows signs of cooling, the dollar risks taking another hit.

The intermediate scenario is consolidation in EUR/USD within the 1.154–1.16 range until new inflation data is released.

For EUR/USD, the key question is whether the pair can hold above 1.16. For USD/JPY, whether the price can remain above ¥158. And for the dollar itself, the main test is still ahead: U.S. inflation.

The market has already stopped believing in an unquestionably strong U.S. economy. Now it needs evidence to prove otherwise.

So we act wisely and avoid unnecessary risks.

Profits to y’all!