The lower the employment rate, the lower the spending. In this case, a recession may be imminent. Against this backdrop, the weakening of the US dollar in response to weak retail sales statistics sounds entirely logical. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- US retail sales data was disappointing.
- The market is speculating about a recession.
- The Fed may lower interest rates three times.
- Positions on the EUR/USD pair can be opened after the US employment report.
Daily US Dollar Fundamental Forecast
Without Donald Trump, fundamental analysis on Forex works like clockwork. Investors view hawkish comments from FOMC officials with understanding, but they focus on macroeconomic statistics. Decisions in the FOMC are made by people, but their views depend on data. What difference does it make that Cleveland Fed President Beth Hammack and Dallas Fed President Lori Logan are expressing concern about inflation and calling for patience if there are signs of a recession in the market?
Investors were seriously concerned about sluggish US retail sales figures in December, a month when consumer spending is traditionally at its highest. What if the weakness in the labor market starts to translate into lower incomes and spending? This is usually followed by an economic downturn. As a result, the derivatives market has raised the odds of three acts of monetary expansion by the Fed in 2026 from 30% a week ago to 44%. Treasury bond yields have fallen, and the EUR/USD has risen.
US Retail Sales
Source: Bloomberg.
Weak retail sales pushed the Atlanta Fed’s leading indicator for fourth-quarter GDP growth down from 4.2% to 3.7%. The main reason was a 0.5 pp adjustment in consumer spending. The current value of the indicator is lower than the 4.4% recorded in the third quarter, but still high.
The US economy is strong but cooling due to the crippling labor market. Just like in the textbooks on fundamental analysis, the result is obvious: a recession. To avoid this, the Fed needs to keep cutting rates ahead of the curve. Otherwise, if employment stabilizes at current levels or exceeds expectations, the likelihood of monetary policy easing will decline, dragging EUR/USD quotes lower.
In this regard, January’s non-farm payrolls will determine the trajectory of the main currency pair. Will it resume its upward trend?
US Nonfarm Payrolls
Source: Bloomberg.
Bloomberg analysts expect employment to grow by 69,000 and unemployment to stabilize at 4.4%. However, investors are more concerned about the revision of data for 2025. In the 12 months leading up to March, the BLS reported a record loss of 911,000 jobs. If something similar happens again, the labor market will be walking a tightrope between increased employment and job losses.
As a result, we are seeing a classic scenario on Forex: an overheated economy is losing steam, and the cooling of the labor market could lead to a recession. The Fed should throw a lifeline in the form of lower interest rates, but only if this scenario plays out.
Daily EURUSD Trading Plan
Disappointing employment statistics will increase the chances of three acts of monetary expansion by the Fed in 2026 and allow traders to increase long positions formed at 1.1835 on the EUR/USD pair. Alternatively, if the US labor market data is strong, it will provide grounds for selling the euro with targets at 1.1835 and 1.18.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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