[MACRO Sharp Comments] The Fed data dilemma and the euro exchange rate game: Dual variations of global monetary policy and market expectations

In Q3 2023, the U.S. Bureau of Labor Statistics (BLS) suddenly announced that it would suspend the high-frequency collection of a number of core economic data, which stems from the strict cuts in non-essential government spending in the congressional budget. As an important reference indicator for the Federal Reserve's monetary policy decision-making, the frequency of non-farm payroll data collection has been reduced from monthly fine tracking to quarterly sampling surveys, and the sample coverage of the Consumer Price Index (CPI) has been reduced by 30%. At the same time, under the dual pressure of the energy crisis and supply chain reconstruction, the European Central Bank has raised interest rates three times in a row beyond expectations, pushing the euro against the U.S. dollar from 1.0572 to the key resistance level of 1.1218 in three months.

These two transatlantic events seem isolated, but they actually have an economic logic: the Federal Reserve is stuck in a policy-making dilemma due to data distortion, and the foreign exchange market is pricing in potential risks to the fundamentals of the U.S. economy in advance through fluctuations in the euro exchange rate. The contradiction between the lag in policy-making and the forward-looking nature of market expectations has exposed the fragility of the global monetary policy transmission mechanism in the post-epidemic era. When traditional economic data models encounter structural changes, the central bank's "data anchor" becomes ineffective, and the speculative forces in the exchange rate market and the real needs of the real economy begin to produce intense friction.

1. The Federal Reserve in the data fog: the struggle between policy caution and political pressure

The data quality crisis recently exposed by BLS has become an invisible shackle for the Fed's decision-making. Due to government funding cuts in early 2025, the agency was forced to suspend CPI data collection in many cities, and the proportion of estimated values ​​soared to a historical high. Some data even relied on estimated values ​​from other collection points. This "data hollowing out" phenomenon is particularly evident in the May non-farm report: the number of 139,000 new jobs was questioned for being inflated. Analysis pointed out that small businesses delayed reporting due to tariffs, causing the statistical system to miss the real economic trends, and the final data may be revised down to around 100,000. Powell implicitly expressed his concerns at a congressional hearing: "The slight decline in the scope of the survey is enough to alert us. Instability in the data will make policy making foggy."

Data distortion has exacerbated policy differences within the Fed. Powell adheres to the principle of "prudent adjustment", believing that although inflationary pressures are temporarily under control, the impact of tariffs on the economy is not yet clear, and a hasty rate cut may amplify policy lags. He specifically pointed out: "The uncertainty caused by tariffs provides a reason to maintain interest rates, and inflation may show a 'meaningful increase' due to trade policies." This position is in sharp contrast to Trump's radical claims - the latter has repeatedly denounced Powell on social media as "stupid and stubborn", believing that high interest rates have pushed up government borrowing costs, and even hinted that interest rate cuts must be initiated in July. However, market expectations for rate cuts have preceded policy implementation. The money market is betting that the Fed will cumulatively cut interest rates by 60 basis points by the end of 2025, while the European Central Bank will only cut interest rates by 25 basis points. This interest rate differential expectation has become a key engine driving the euro's strength.

2. Battle of the Euro at 1.17: The resonance of institutional bullishness and the dollar's decline

As the Fed's policy expectations fluctuate, the euro is playing a key technical breakthrough against the dollar. According to the Depository Trust & Clearing Corporation (DTCC) data, $1.17 has become the most concentrated euro call option gathering area this month. If it is effectively broken through, it will open the channel to the highest water level in four years, $1.20. In June 2025, the euro rose to 1.1645 against the dollar, a new high since October 2021, behind which are multiple positive factors: the ceasefire between Iran and Israel eased geopolitical risks, the largest drop in new home sales in the United States in May in nearly three years exposed the economic weakness, and Powell's statement that "there are multiple paths for monetary policy" opened up imagination for interest rate cuts.

Institutional optimistic expectations for the euro have formed a combined force. HSBC strategists raised their year-end target price from 1.15 to 1.20. Danske Bank and Deutsche Bank both predicted that this level would be reached within 12 months. UBS even pointed out that "US interest rates will fall faster than other G10 countries" and expected the euro to reach 1.23 against the dollar at the end of the year. The bullish sentiment in the options market is particularly significant: the risk reversal index recorded the fourth largest single-day increase in more than three years, and the proportion of bullish contracts in euro options this month exceeded 60%, indicating the market's confidence in the continued strength of the euro. The ECB's policy narrative provides fundamental support for the euro. Chief Economist Ryan said that although price pressures remain, the process of inflation returning to the 2% target is "close to completion", which contrasts with the Fed's dilemma of still having to deal with data distortion, further strengthening the relative attractiveness of the euro.

3. The logic of global market linkage: the transmission chain from data crisis to exchange rate game

The BLS data quality crisis is not an isolated incident. It affects the global market through three channels: first, the "false prosperity" of data estimates may conceal the truth of the US economic slowdown, causing the Federal Reserve's policy lag and the market to price in interest rate cut expectations in advance; second, the policy struggle between Trump and Powell has increased uncertainty, and the attractiveness of the US dollar as a "safe haven asset" has declined; finally, the European and American interest rates have lowered expectations for the euro, and the transmission chain of the European and American interest rates has increased.

This linkage is particularly prominent in the current market: when the BLS is forced to rely on historical trends to estimate employment data due to a shortage of funds, foreign exchange traders are betting on a euro breakthrough based on the Fed's possible policy shift; when Powell emphasized "cautious rate cuts" at the hearing, the options market has voted for the euro's 1.20 target with real money. The disconnect between data quality and market expectations constitutes the core contradiction of global monetary policy in 2025.

Conclusion: Policy and market competition in an era of uncertainty

The Fed’s data dilemma and the euro’s exchange rate offensive are essentially two sides of the same coin. Against the backdrop of declining reliability of economic data and challenges to policy transparency, the market is redefining asset value with a more aggressive pricing logic. For Powell, how to maintain policy credibility in the fog of data while resisting the dual impact of political pressure and market expectations will determine whether the Fed can take the initiative in this “game of data and exchange rates.” For global investors, the 1.17 euro level is not only a technical resistance level, but also a touchstone for measuring the credibility of the Fed’s policies and the resilience of the dollar’s ​​hegemony.