The US labor market report has shown that the economy is starting to cool down. So, all the speculations about raising the interest rate hike have no basis. In reality, the Federal Reserve is content with the work done and has no intention of doing more. However, their intention to keep borrowing costs elevated for an extended period is being seriously questioned. They allowed EUR/USD to break through the upper band of the 1.05-1.07 range. Is consolidation a thing of the past?

U.S. nonfarm payrolls grew by 150,000 last month, and the unemployment rate rose to 3.9%. Both figures turned out worse than Bloomberg experts' forecasts, which led to a drop in Treasury yields and weakened the dollar. The slowdown in wage growth to 4.1% confirms the downward trend in inflation and has reduced the likelihood of monetary tightening in 2023 to 9%. A month ago, that probability stood at 39%.

US employment

Given how bullish bets have been on the dollar and bearish on Treasuries, the EUR/USD rally could proceed very quickly. Markets are testing the idea of the Fed maintaining borrowing costs at a plateau for an extended period. If the US economy continues to deteriorate, the central bank will have less reason to do so. At some point, there will be a dovish pivot, which will finally break the downtrend in EUR/USD.

Currently, derivatives indicate a decrease in the federal funds rate by 80-100 basis points to 4.75% in 2024, which is at odds with the Fed's stance. The market principle "don't fight the Fed" has not been revoked. However, the central bank makes mistakes from time to time, and investors are well aware that it's possible to make good money on its blunders.

Market expectations for the Fed and ECB interest rates

Thus, the market narrative has changed in November. While previously, markets were wondering if the Fed would resume its monetary tightening cycle, they are now concerned about the truthfulness of its intentions to keep rates on a plateau. Investors don't believe them and are actively getting rid of the US dollar.

In this situation, it doesn't matter how weak the euro is. Yes, the eurozone's economy leaves much to be desired. However, the European Central Bank's Chief Economist, Philip Lane, looks to the future with optimism. He expects the currency bloc to avoid recession. His colleague on the Governing Council, Isabel Schnabel, cannot confirm that interest rates have peaked. Even geopolitics and the impending energy crisis in Europe do not scare the bulls.

Technically, on the daily chart, EUR/USD has broken out of the consolidation range of 1.05-1.07. This represents the execution of a "Splash and Shelf" pattern. There is a high probability of transitioning to a trend, which makes it possible to add long positions formed from 1.065 and 1.067. The targets are set at 1.08 and 1.09.