EUR/USD Above 1.157: The Trendline Broke Because the Rate Differential Did

The euro just pushed above €1.157, the highest it's been since mid-June. If you follow the technical crowd, there's a trendline that broke, a target of 1.16065 that traders are eyeballing, and a chart pattern that tells you where price goes next.

But charts don't move currencies. Rate expectations do. And what happened yesterday was a plumbing event, not a breakout.

Here's the data most commentary is skipping. On Friday, the Bureau of Labor Statistics reported that the US economy shed 23,000 jobs in July. The consensus was 80,000 added. June's gain was revised down from 57,000 to 20,000. The private sector added just 30,000, offset by a seasonal-looking loss of 53,000 government positions. Labor force participation dropped to 61.4%, the lowest level in 50 years outside the pandemic era.

The market didn't need a second to reprice. Investors removed a September Fed rate hike from their expectations. CME FedWatch moved to a 60% probability the Fed holds steady. On Kalshi, the hold odds sat at 65%. Just before the report, markets had priced in better than a 50% chance of a hike.

Now flip to the other side of the Atlantic. The European Central Bank hiked 25 basis points in June — the first rate increase in three years, driven by energy-driven inflation from the Middle East conflict. They held in July, adopting a cautious "wait-and-see" posture. But markets currently assign a 70% probability to a September ECB hike, with roughly a 40% chance of a second increase by year-end.

That is the mechanism. The Fed is now perceived as likely to pause. The ECB is perceived as likely to tighten. The rate differential is widening in euros' favor. The dollar weakened, the euro strengthened, and the trendline happened to break because price was pushed by something real.

The DXY — the dollar index, which is heavily weighted to the euro — had its worst week in three months. It failed to break out of multi-year downtrend resistance earlier in July and is now trading around 99.5. The dollar's technical breakdown and the euro's technical breakout are two sides of the same coin. When one side of a currency pair moves, the other has to move too. It's not two signals. It's one.

Understand what I understand about how central bank differentials drive FX, and the picture gets simpler. The Fed's benchmark rate sits at 3.50% to 3.75%. The ECB's deposit facility rate is at 2.25%. On paper, the dollar should still carry a significant yield advantage. But markets don't trade current rates. They trade expected paths. And the expected path just shifted — the Fed is going on hold while the ECB may still have one or more moves left.

Add in the energy backdrop. Brent crude is below $80 a barrel. Iran-Oman negotiations over the Strait of Hormuz are "moving along," and a deal to reopen shipping routes would ease inflationary pressure on both sides of the Atlantic. But the eurozone is more sensitive to energy shocks than the US, which has its own supply. If energy prices stay subdued, the ECB's urgency to hike drops. If they spike, the ECB's case for tightening strengthens. The energy variable is the wild card in this rate-differential trade.

Yes, EUR/USD could push higher. The quarterly forecast consensus is around 1.16. Some models see 1.18 over the next year. But asking whether the euro will hit 1.16065 because of a trendline is like asking whether a stock will gap up because it touched a moving average. The chart reflects what already happened in the rate market. It doesn't cause the next move.

So here's what matters going forward, and here's the conditional chain. If the upcoming CPI reading comes in hot — which is still possible given inflation runs at 3.5%, well above the Fed's 2% target — the Fed's September pause could reverse, rate-hike odds return, and the dollar bounces back. The euro's breakout gets squeezed. If CPI comes in cooler or flat, the Fed stays on hold, the ECB diverges further, and the euro keeps room to run. And if the Iran-Oman deal falls through and energy prices spike, both central banks face pressure, but the ECB's smaller economy and energy dependence give the dollar relative safety.

The trendline broke because the rate expectations plumbing shifted. Watch the next CPI print next Wednesday, watch the Iran negotiations, and watch whether the ECB's September hike actually happens or whether the 70% market pricing is running ahead of what the central bank is willing to do. The chart doesn't tell you the answer. The rate path does.

Views expressed here are personal and should not be considered investment advice. Foreign exchange markets carry significant risk, including the possibility of losing more than your initial investment when trading with leverage.