Dollar Consolidation: EUR/USD Stuck Below $1.16 as Fed Rate Hikes Linger
The US Dollar has been experiencing consolidation following the disappointing July Payrolls report. Strategists at TD Securities note that the USD weakened after the report, but expect limited downside against G10 currencies unless there is softer US inflation.
They believe that EUR/USD may struggle to break above $1.16 without a benign CPI print. On the other hand, USD losses could extend further against select EM currencies. TD Securities continue to expect the Fed to keep rates unchanged through 2026 and 2027.
The July Payrolls report showed a drop in the unemployment rate to 4.1%, easing concerns over a reaccelerating labor market. This led markets to price out hikes, with September's pricing declining by 3bp to 12bp of hikes. However, the risk of a hike still lingers.
TMGM Analysis notes that without removal of near-term Fed rate hike pricing, the USD's cumulative return in US trading hours is unlikely to dip to negative territory. They believe that specific for EUR/USD, the bar for an upside breakout above $1.16 without soft US CPI data remains high.