EUR/USD Capped as U.S. Yields Rise Before Jobs Data

Quick Take

EUR/USD is still struggling because the dollar has the stronger short-term driver. Reuters reported on 1 July that the euro fell to around $1.1404, while the dollar index held near 101.31, supported by a sharp rise in U.S. Treasury yields before key U.S. jobs data. The U.S. 10-year yield rose to around 4.465%, and traders were pricing a 67% chance of a Fed rate hike in September.

Why the Dollar Is Still Pressuring EUR/USD

The dollar is getting support from two places at the same time: higher yields and stronger Fed expectations. U.S. job openings rose to a two-year high in May, and markets are now watching the nonfarm payrolls report to see whether the labour market gives the Fed more room to tighten.

For EUR/USD, this is important because the pair usually needs either lower U.S. yields or weaker Fed pricing to recover cleanly. When U.S. yields are rising faster than eurozone yields, the dollar keeps the advantage even if the euro has some domestic support. Reuters noted that the increase in U.S. yields outpaced the rise in eurozone bond yields, which helped keep the dollar firm.

Eurozone Data Is Not Fully Weak

The euro is not without support. Eurozone manufacturing is showing some resilience. The S&P Global Eurozone Manufacturing PMI slipped only slightly to 51.4 in June from 51.6 in May, staying above the 50 line for a fifth straight month. Reuters also reported that factory output completed its strongest quarter since early 2022.

This matters because it prevents the eurozone story from becoming completely bearish. If manufacturing remains in expansion and cost pressures ease, EUR/USD can still attract buyers on dips, especially when the market thinks Europe is no longer facing the same energy shock as earlier in the quarter.

But Softer Inflation Reduces ECB Urgency

The problem for the euro is that softer inflation readings are reducing the need for the ECB to stay aggressively hawkish. Germany, France and Italy all reported softer-than-expected inflation, and Reuters said this increased the chance that overall eurozone inflation could undershoot expectations. Economists had forecast eurozone inflation at 3.0% for June.

The country details also matter. German inflation slowed to 2.4% from 2.7%, French inflation fell to 2.0% from 2.8%, and Italian inflation eased to 3.1% from 3.2%. Spain was the exception, with inflation unchanged at 3.6%.

This does not mean the ECB can ignore inflation. But it does mean the market has less reason to chase the euro purely on the idea of repeated rate hikes.

ECB Support Is Becoming More Defensive

The ECB already raised rates in June because inflation had moved above its target after the energy shock. Reuters reported that the ECB’s updated projections put inflation at 3.0% in 2026, 2.3% in 2027, and 2.0% in 2028. That still gives the euro a policy floor.

However, the tone is no longer one-sided. Reuters reported that eurozone consumer inflation expectations for the next year fell to 3.5% in May from 4.0%, while three-year and five-year expectations stayed at 2.9% and 2.4%. Markets were still pricing between one and two more ECB hikes, but the next move was not fully priced until autumn.

So the ECB story supports the euro on dips, but it is not strong enough to dominate the dollar when U.S. yields are rising.

Why EUR/USD Still Looks Capped

EUR/USD is being pulled in two directions. The euro has some support from resilient manufacturing and the ECB’s inflation focus. But the dollar has stronger immediate support from Treasury yields, Fed hike pricing, and caution before U.S. jobs data.

That makes EUR/USD more likely to trade as a capped range than a clean rebound. A soft U.S. jobs report could reduce the dollar’s advantage and help the pair recover. But a strong report would likely keep Fed hike expectations alive and maintain pressure on EUR/USD.

Near-Term View

My near-term view is that EUR/USD may remain capped while U.S. yields stay firm and markets keep pricing a high chance of a September Fed hike. The euro can still find support if eurozone manufacturing remains resilient, but softer inflation makes it harder for the ECB to sound more aggressive.

A stronger EUR/USD rebound would likely need weaker U.S. labour data, lower Treasury yields, or a clear drop in Fed hike expectations. Without that, rallies may continue to face selling pressure near resistance.

Conclusion

The main point is simple: EUR/USD has euro-side support, but the dollar is still in control. Eurozone manufacturing is holding up, yet softer inflation reduces ECB urgency. With U.S. yields rising before jobs data and Fed hike pricing still strong, EUR/USD remains capped rather than convincingly bullish.