The market is locked in a tug-of-war over the Fed's September rate decision, and the outcome will be decisive for the forex market and the dollar's near-term path.

The consensus is split on whether the Fed will hike interest rates in September or hold them steady. On one side, rate-hike advocates point to stubbornly high inflation — above target for more than 60 weeks — and rising Treasury yields as evidence the Fed (and Chair Warsh personally) will have to act. They argue that higher yields fully reflect current conditions the Fed must respect.

On the other side, there are growing arguments for a pause. Weak labor market signals from recent data suggest the Fed may prefer to wait. If upcoming inflation reports, especially the consumer figures, are little changed from July, the case for inaction will strengthen.

How might markets react? If US nonfarm payrolls print weaker than the roughly 55,000 job gain currently forecast and inflation remains stable, the Fed is likely to favor a continued pause. That scenario would likely lift equities, put downward pressure on the dollar, and support gold, other precious metals, and crypto assets. Treasury yields would likely fall as well.

Federal funds futures already reflect this tug-of-war. After a weak ADP report, the probability of a September 16 rate hike has eased from about 68% to 60.2%. Those odds could fall further if headline jobs data disappoints.

Daily outlook:

EUR/USD

The pair is trading above 1.1600 ahead of the US jobs release. If risk skews dovish for the Fed, EUR/USD may find support and climb toward 1.1656 and then 1.1700. A potential buy level: 1.1612. Suggested stop-loss: 1.1575.

EUR/JPY

The pair is under pressure amid expectations that the Bank of Japan could deliver a sharp rate move — possibly +50 bp or even +75 bp. In that environment, EUR/JPY may slide toward 180.65. A potential sell level: 181.65. Suggested stop-loss: 183.53.