The Euro (EUR) has faced renewed downside pressure against the US Dollar (USD) as softer-than-expected Eurozone inflation data and falling yields have weighed on the currency ahead of the US Nonfarm Payrolls (NFP) report. According to MUFG’s Lee Hardman, the latest Eurozone Consumer Price Index (CPI) report for June showed headline inflation slowing to 2.8% and core inflation to 2.4%, both below expectations. This has pushed EUR/USD and EUR/GBP below key support levels at 1.1400 and 0.8600, respectively, and reinforced a bearish outlook for the Euro in the near term [1].
The decline in Eurozone yields has been notable, with the 2-year government bond yield dropping by over 30 basis points since peaking at 2.83% on June 18, a larger move than seen in UK and US rate markets over the same period [1]. The softer inflation and lower yields have led markets to become less confident in the prospect of another European Central Bank (ECB) rate hike, with the ECB’s 'milder' scenario now appearing more likely. ECB Chief Economist Philip Lane recently indicated that the top of the neutral policy rate range has been raised by 25 basis points to 2.50%, but MUFG notes that while a September hike is still possible, the risk of rates being left on hold for the rest of the year has increased [1].
Despite these headwinds, the EUR/USD pair traded higher on Thursday, recovering above 1.1400 as traders trimmed USD long positions ahead of the US NFP report. However, the pair remains within its weekly range and below the 1.1435 resistance, maintaining a broader bearish trend after a 2% decline in June, marking its weakest monthly performance since July of the previous year [2]. Technical analysis suggests that while momentum is mildly constructive, the pair remains on the defensive below 1.1550, with consolidation more likely than a bullish reversal at this stage [2].
Market participants are closely watching the upcoming US NFP report, with consensus expecting a 110,000 net increase in employment for June and the unemployment rate steady at 4.3%. Strong US data and above-target inflation have kept the USD buoyed, as investors anticipate further Federal Reserve rate hikes in the coming months [2]. The USD was the strongest against the Australian Dollar on the day, while the EUR gained 0.29% against the USD in percentage terms [2].
CONCLUSION
Softer Eurozone inflation and falling yields have increased downside risks for the Euro, with markets now less confident in further ECB tightening. While EUR/USD has seen a modest rebound ahead of the US NFP report, the broader trend remains bearish, and the outlook hinges on upcoming US labor data and central bank policy signals.