US Dollar Strength Amid Mixed Economic Signals: Contrarian Opportunities in EUR/USD and USD/JPY

The US dollar's recent rally has been fueled by a mix of fiscal stimulus, trade policy uncertainty, and stubbornly resilient wage growth. Yet beneath the surface of the latest payroll data lies a critical imbalance: government hiring is buoying employment figures while the private sector falters. This divergence, coupled with geopolitical risks and Fed policy crosscurrents, creates a prime environment for contrarian bets in forex markets. Let's dissect how EUR/USD and USD/JPY present opportunities to profit from overextended dollar strength.

The Payroll Data Mirage: Government Jobs vs. Private Sector Weakness

The May and June payroll reports highlight a stark dichotomy. While total nonfarm payrolls rose modestly (147k in June), the gains were disproportionately driven by state and local government hiring, particularly in education and social assistance. Meanwhile, the private sector—excluding healthcare—is struggling. Manufacturing shed jobs, construction growth slowed, and professional services declined, reflecting broader economic caution.

This reliance on government hiring is unsustainable. Federal employment has plummeted by 69k since January, and state/local gains may reverse as fiscal stimulus fades. Private sector wage growth, while still robust at 3.7%, is cooling, suggesting labor market slack is emerging. A dollar rally built on such fragile foundations is ripe for a correction.

EUR/USD: A Bullish Bias Hiding Bearish Risks

The euro has been under pressure as the Fed's policy path remains hawkish relative to the ECB. Yet technicals suggest EUR/USD is nearing a critical inflection point.

Technical Setup:
- Immediate Support: 1.1573 (April high) and 1.15 (psychological floor).
- Key Resistance: 1.1710 (Fibonacci extension) and 1.18-1.20.

While the pair faces near-term resistance, a break below 1.1530 could trigger a slide toward 1.1060 or even 1.0600. Contrarians should buy dips near 1.15 with a stop below 1.14, targeting 1.18. The Fed's July 3 payroll report could catalyze this move—if private sector weakness becomes undeniable, the dollar's narrative unravels.

Fundamental Catalysts:
- EU Trade Talks: A breakthrough in transatlantic tariff negotiations (deadline July 9) could relieve pressure on European exporters and boost EUR.
- Fed Policy Uncertainty: If June's ADP private sector contraction (-33k jobs) signals a broader slowdown, Fed rate cuts could accelerate, weakening the USD.

USD/JPY: Range-Bound Until Policy or Geopolitical Breakout

The USD/JPY has oscillated between 142.40 and 145.40 since early 2024, with little progress. The yen's resilience stems from BOJ dovishness and geopolitical risks (e.g., Middle East tensions).

Technical Levels:
- Support: 143.68 (multi-year trend), 142.00 (2023 low).
- Resistance: 145.40 (current ceiling), 146.50 (bullish breakout threshold), and 150.08 (52-week MA).

A sustained break above 145.40 could signal a move toward 150+, but contrarians should sell rallies near 145 with a target of 142.00. The BOJ's balance sheet adjustments and any Fed pivot toward easing would amplify this yen strength.

Key Risks:
- Japan's Tariff Policy: If Tokyo retaliates against US trade restrictions, yen demand could spike as investors flee risk assets.
- BOJ Policy Shift: Even whispers of yield curve control easing could send USD/JPY lower.

Contrarian Strategy: Fade the Dollar Rally

1. EUR/USD: Buy at 1.15 with a stop below 1.14, targeting 1.18.
2. USD/JPY: Sell at 145.00 with a stop above 145.80, aiming for 142.00.
3. Risk Management: Use 5-7% position sizing, as geopolitical catalysts (July tariff deadlines, Fed meetings) could amplify volatility.

Conclusion

The US dollar's strength is a house built on shaky government hiring and Fed hawkishness. As private sector cracks widen and geopolitical risks loom, EUR/USD and USD/JPY offer asymmetric opportunities to profit from a reversal. Technical levels and macro catalysts align to suggest the dollar's rally is nearing its limits—now is the time to bet against it.