Interest Rate Forecast: Weak Jobs Data Hits Fed Hike Odds as Dollar Tests Support

Author: Muhammad Umair

Published: July 5, 2026

Key Points

• Weak jobs data has reduced the likelihood of a Federal Reserve (Fed) rate hike in July, but rising overtime hours and temporary jobs keep the Fed cautious.
• The US dollar is under short-term pressure due to lower hike expectations, but the possibility of a September hike provides some support.
• The EUR/USD may gain if bets on a Fed pause increase, but softer Eurozone inflation and ECB caution could limit the rally.

Overview of Jobs Data

The latest jobs report indicates that the US economy created only 57,000 new jobs in June, significantly below the revised estimate of 129,000 for May. This slowdown suggests a weakening labor market, which is crucial for the Fed's interest rate decisions. However, the unemployment rate has dropped to 4.2%, and while initial jobless claims are low, continued claims have increased, indicating longer job searches for those unemployed.

Positive Aspects of the Jobs Report

Despite the weak job creation numbers, there are positive signs: average weekly overtime hours and temporary help jobs have increased, suggesting that employers still need workers but are hesitant to hire full-time staff. This mixed data leaves the Fed in a cautious position, as they may choose to wait for more information before making any rate changes.

Market Expectations and Fed Outlook

Traders currently see only a 21.9% chance of a rate hike in July, indicating a shift in expectations. The Fed's primary concern is whether the slowdown in job growth will lead to decreased inflation pressures. Average hourly earnings have shown a decline, which could ease inflation concerns and allow the Fed to maintain current rates.

US Dollar Performance

The US dollar is experiencing short-term pressure due to reduced expectations for a July rate hike. However, the potential for a September hike keeps the dollar supported above key levels. The next inflation and labor data will be critical in determining the dollar's trajectory.

EUR/USD Dynamics

The interest rate differential between the US and Eurozone may favor the euro if the Fed pauses in July. However, Eurozone inflation has also decreased, which may limit the ECB's ability to raise rates. The EUR/USD pair is currently showing bullish momentum, with potential targets for upward movement if certain resistance levels are breached.

Conclusion

The weak jobs data has lessened the immediate pressure on the Fed to raise rates in July, but it does not eliminate the possibility of future hikes. The mixed signals from the labor market leave the Fed in a "wait and see" mode, with upcoming inflation and labor reports likely to influence their decisions. The US dollar remains in a complex situation, with potential for both support and weakness depending on future economic indicators.