The euro declined to session lows below 1.16 against the dollar as the single currency came under pressure from a stronger greenback, weaker-than-expected German retail sales, and rising oil prices ahead of Eurozone inflation data.
German retail sales fell 3.4% in July, the steepest drop in more than four years and sharply below the 0.4% increase expected. The decline underscores weakening consumer demand in Europe’s largest economy and complicates the European Central Bank’s policy calculus as inflation is projected to accelerate to 3.3% in August from 2.9%.
A higher-than-anticipated inflation reading could reinforce expectations for an ECB rate hike this month, though rising oil prices—with Brent crude back above $90 a barrel, up over 6% from last week’s lows—risk exacerbating growth concerns. The euro now faces competing forces: inflation supporting tighter policy versus softer growth weighing on sentiment.
The dollar, meanwhile, has strengthened on higher U.S. Treasury yields and a more hawkish tone from Federal Reserve officials. Markets are pricing in roughly a 65% probability of a September rate hike, up from last week’s levels. Geopolitical tensions in the Middle East have also bolstered the dollar through safe-haven demand, while elevated oil prices add to U.S. inflation risks.
Attention now turns to Friday’s U.S. nonfarm payrolls report. After July’s unexpected contraction of 23,000 jobs, a rebound would reinforce expectations for a September rate hike and could extend the dollar’s gains.
Technical analysis suggests EUR/USD remains capped below the 1.17 resistance area following its recovery from the 1.1350 low. While the pair holds above both the 50-day and 200-day moving averages, recent lower highs indicate momentum has softened. A sustained move above 1.1650 and then 1.17 would signal a higher high and potentially open the path toward 1.18 and 1.1850. On the downside, a break below the 200-day EMA near 1.1565 and the 50-day EMA near 1.1550 would weaken the structure, bringing 1.15 and 1.1350 into view.
Across the Pacific, USD/JPY is approaching the critical 160 level as the yen weakens despite Japanese 10-year government bond yields rising to 3%, the highest since 1996. Typically, higher Japanese yields would support the yen, but the dollar’s broad strength is currently outweighing that effect.
U.S. Treasury Secretary Scott Bessent has publicly advocated for a stronger yen, and Japan and the U.S. have reaffirmed coordination on orderly currency movements. This has heightened speculation of potential intervention if USD/JPY moves significantly above 160. The Bank of Japan’s policy path remains a key uncertainty, with markets increasingly expecting a September rate hike amid growing pressure on Governor Ueda to tighten further.
For now, the interest rate differential continues to favor USD/JPY, with higher U.S. yields, firmer oil prices, and the Fed’s hawkish stance all weighing on the yen. Friday’s payrolls data could prove pivotal: a robust report would reinforce expectations for higher U.S. rates, while a weaker-than-expected print might ease pressure on the yen.
