US Dollar Weakens Ahead of NFP—Is EUR/USD a Buy on Dips?

US Dollar Faces Pressure Amid Economic Uncertainty

US Dollar movements have been a key focus in FX markets this week, with a weakening trend driven by softer economic data and policy uncertainty. The February jobs report is now in the spotlight, as a weaker-than-expected figure could reinforce concerns about a sharper economic slowdown in the United States.

The dollar has been under pressure as US swap rates have fallen by 45 basis points from last month’s peak. Market sentiment is shifting, with expectations that the Federal Reserve’s terminal rate for the current easing cycle may drop below 3.50%. While today’s Non-Farm Payroll (NFP) report is expected to show a 160k job increase and an unemployment rate holding steady at 4.0%, the Bloomberg whisper number suggests a softer 120k gain. Concerns over weather effects and changes in government education funding could also impact the headline figure.

Despite its fragility, the US Dollar Index (DXY) has already experienced a 3.5% decline this week, its sharpest drop since November 2022. Current long-dollar positioning appears far lower than in late 2022, following the currency’s two-year rally. Support for the DXY is seen around 104.00, with potential consolidation in the 103.75–104.50 range unless today’s jobs report significantly underperforms expectations. Given recent trends and the heavy weighting of European currencies in the DXY, it is increasingly likely that the dollar has peaked for the year.

EUR/USD Outlook: Re-Rating in Progress

The euro has been undergoing a significant revaluation, supported by expectations of looser fiscal and tighter monetary policy within the eurozone. If Germany’s proposed infrastructure fund is fully implemented, it could add approximately 1% to annual German GDP growth. Additionally, forecasts now indicate that the European Central Bank’s terminal rate may settle at 2.25% instead of 1.75%.

This shift in outlook has driven the 10-year EUR swap rate from 2.70% toward an expected 3.50%. As a result, analysts have revised their EUR/USD range projection from 1.00–1.05 to 1.05–1.10.

In the short term, EUR/USD appears slightly overbought and may struggle to surpass the 1.0850–1.0875 range. However, strong support is likely to emerge in the 1.0670–1.0700 zone, encouraging traders to buy on dips, given the latest market developments.

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