Euro Is Eyeing Sky-high

The U.S. Dollar Index (DXY) fell 0.39% to 97.38 this week, while the EURUSD advanced 0.31% to 1.17590. Gains in the Euro were tempered by political instability in France, where the government was dismissed, marking the fourth resignation in two years. Market reaction was relatively muted, although 10-year French government bond yields edged higher to 3.48% from 3.40%. Investors, however, remain more focused on U.S. macroeconomic signals than European political risk.

The spotlight is on the U.S. labour market. August’s Nonfarm Payrolls rose by just 22,000, well below the forecast of 78,000 and the weakest since October 2024. Unemployment climbed to 4.3% from 4.2%, the second consecutive monthly increase. The slowdown has reinforced criticism of the Federal Reserve’s (Fed) hawkish stance and opened the door to more aggressive easing expectations. Bets of a 50 basis point rate cut by the Fed in September rose from 10.0% on Friday to 11.8% by Tuesday morning.

Another catalyst looms on Tuesday with the release of revised employment data covering the period through March 2025. After bold revisions to May and June figures, markets now anticipate a potential downward revision of roughly 700,000 jobs. If confirmed, it would suggest the Fed should have started easing earlier in the summer. Such a revision could dramatically strengthen the case for a 50 bp cut and put the Dollar under fresh pressure. This could translate in sharp post-holiday moves after the U.S. Labour Day weekend if American investors support such developments.

Technically, the EURUSD has broken out of its 1.16000–1.17000 range and confirmed the breakout with a successful retest of 1.17000. This points to the beginning of a rally toward the extreme target of 1.19500–1.20500. The crucial level to watch is 1.17000: holding above it on Tuesday will preserve bullish momentum, while a break back below would cast doubt on the breakout.

Volatility risks will intensify midweek. The U.S. Producer Price Index (PPI) arrives Wednesday, but the bigger drivers will come Thursday with the European Central Bank’s policy decision, widely expected to keep rates unchanged, and the U.S. Consumer Price Index (CPI) for August. Wall Street expects CPI to rise to 2.9% YoY. A softer-than-expected print would likely fuel a broader Dollar sell-off. The weekly high for the EURUSD stands at 1.18500, but a combination of weak labour data, subdued inflation, and intensifying Fed easing pressure could push the pair significantly higher.

Meanwhile, positioning signals remain bearish for the Dollar. Large investors continue to unwind exposure in the WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU). They sold another $3.9 million last week, leaving their net position at $12.8 million, down sharply from $30.3 million just weeks ago.