EUR/USD edged higher on Wednesday, holding near its recent 1-1/2-month high as the pair consolidates gains made since its July 28 low. The steady trade reflects a combination of bullish influences currently in place, with long-positioned investors now hoping that Friday's U.S. July payroll report can help reignite the broader rally.

These bullish influences stem from three main sources: market positioning, inflation-rate expectations, and yield differentials.

On positioning, the latest CFTC data show the net-long U.S. dollar positions have hit record highs, while the net-short euro positions are at their largest since December 2024, suggesting room for a reversal.

Meanwhile, U.S. breakeven inflation rates and inflation-linked swaps have been moving lower again, as the recent drop in oil prices leads investors to expect cooling inflation—a dynamic that could shift market focus more squarely onto the upcoming jobs report. Additionally, U.S.-German 2-year yield differentials have tightened slightly since last week, further supporting EUR/USD's recent climb.

Attention now turns to the July U.S. payroll data, especially after the July ADP employment report missed estimates and June's figure was revised lower. Should July nonfarm payrolls disappoint and the unemployment rate rise above expectations, it would likely weigh on the dollar as markets scale back expectations for Fed tightening and increase bets on future rate cuts. In that scenario, dollar-long investors may begin unwinding those trades, while U.S.-German yield spreads could narrow further. This combination could give EUR/USD the spark needed to break higher, potentially pushing above the 200-day moving average and toward resistance near 1.1800.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)