Euro Retreats as Cooling Inflation Dampens ECB Rate Hike Expectations

The EUR/USD pair slipped to approximately 1.1420 during Thursday’s early Asian session, pressured by a weakening inflation outlook within the Eurozone. Despite disappointing US labor market data, the US Dollar maintained strength against the Euro. Investors are now looking forward to an upcoming speech by European Central Bank (ECB) President Christine Lagarde on Friday.

Fresh data from Eurostat revealed that Eurozone headline CPI cooled more sharply than anticipated, falling to 2.8% year-over-year in June from 3.2% in May. Core inflation also declined, dropping to 2.4% from the previous 2.6%. This deceleration has lessened the pressure on the ECB to maintain an aggressive tightening cycle, weighing on the single currency. According to Reuters, financial markets currently price in a one-in-three chance of a July rate hike, while a move by October is considered fully priced in.

Maltese central bank chief Alexander Demarco and other ECB policymakers suggested Wednesday that the central bank should avoid rushing into further hikes, citing the rapid decline in oil prices. Meanwhile, President Lagarde defended last month’s rate increase, noting that the ECB remains vigilant regarding second-round inflationary effects, though such effects have not yet materialized.

Conversely, the US Dollar’s downside may be capped by weak Nonfarm Payrolls (NFP) data. The US Bureau of Labor Statistics reported that the US economy added only 57,000 jobs in June, significantly missing the market consensus of 110,000.

Additionally, while the US Unemployment Rate ticked down to 4.2% from 4.3% in May, this followed a report on Wednesday showing that private payroll growth in June was lower than expected.

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