EUR/USD erased most of its losses Tuesday and neared flat on the session as slumping U.S. Treasury yields US2YT=RRUS10YT=RR weighed down the dollar but investors positioned short EUR/USD may face serious consequences if U.S. employment data does not cooperate.

This week U.S. July JOLTS, August ADP, weekly claims and August payroll reports are due.

Fed Chair Powell said in his Jackson Hole speech that the central bank doesn't wish to see further deterioration in the labor market.

Results indicating weaker jobs markets are likely to send the U.S. rates complex much lower as investors may price in aggressive Fed cuts.

As it currently stands, German-U.S.
2-year yield spreads US2DE2=RR trade their tightest since mid-July 2023.

EUR/USD struck an 11-session low Tuesday but could erase its recent drop should weak labor reports tighten spreads further.

Rate differentials between SOFR and Euribor futures may also tighten and help rally EUR/USD.

Short-term rates markets indicate a differential of less than 100bps when the Fed SRAM26 and ECB FEIH6 complete their cutting cycles.
Downbeat U.S. labor data could further reduce that differential, which would drive a EUR/USD rally.

Resistance in the 1.1600/25 area may come into focus if U.S. labor market data surprise to the downside.

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