Non-farm payrolls might lead to a turnaround

Key points：

1. Eurozone manufacturing PMI was 45.8 in August
2. Trading volumes could be low due to US Labor Day
3. EUR/USD found support at 1.1050

Options traders have become pessimistic about the euro, as the currency's rise to a one-year high may soon lose momentum.

The one-month risk reversal for EUR/USD has fallen below zero, indicating that the premium for protecting against a decline in the euro has started to rise.
This indicator is viewed as a barometer of market positioning and sentiment, and it expanded last week to the most favorable level for the euro since the end of 2020.

The decline in the EUR/USD

The euro's advance has begun to lose momentum, falling to 1.1042 against the dollar on Monday, its lowest level since August 19, after surging to a one-year high of 1.1202 last week.

The decline in the EUR/USD risk reversal indicator suggests that the market is increasingly concerned about the sustainability of the euro's gains," said Kristoffer Kjaer Lumholt, head of foreign exchange research at Danske Bank in Copenhagen. He mentioned that any further rise in the euro would present a good opportunity to sell it.

Investors heavily bought into the euro last month, with hedge fund bets on a stronger euro reaching their highest level in over a year, according to CFTC data.

The EUR/USD is climbing after a decline of over 1% last week. However, today's gains might be limited, as both the Federal Reserve and the ECB are anticipated to lower interest rates later this month.

On Friday, data revealed that eurozone inflation eased to 2.2%, down from 2.6%. ECB governing council member indicated on Friday that there are compelling reasons for the central bank to consider a rate cut in September. Today's data reinforced this perspective, with the manufacturing PMI showing further contraction this month at 45.8, slightly down from 45.6.

Expectations of Fed rate cuts

Improvement in U.S. employment data later this week is expected to increase downward pressure on the euro, as it would reduce expectations of significant Fed rate cuts in the coming months—expectations that have recently pressured the dollar.

Elias Haddad, senior market strategist at Brown Brothers Harriman, noted that a solid U.S. employment report might diminish market expectations for a 100 basis point rate cut by the Fed by the end of the year. Meanwhile, the ECB, having cut rates for the first time in early June, is expected to do so again in September, with investors anticipating at least one more cut by the end of the year.

"If U.S. employment data this week signals a soft landing in the labor market, Fed fund futures should increase, which would benefit the dollar and reduce speculative long positions in the euro," Haddad said.

Although many in the market have bet on the euro as a way to capitalize on a weaker dollar, speculating that the ECB might cut rates less than the Fed this year, these bets could be questioned.

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