EUR/USD extended an intraday rebound in early European trading on Thursday, retaking 1.1400 after recovering much of its overnight slide to a weekly low. The US dollar eased after weaker-than-expected US data and remarks from Federal Reserve Chair Kevin Warsh that offered no explicit guidance on the future rate path. ADP said private-sector employment rose by 98K in June, down from 122K previously and below a 113K forecast, while the ISM Manufacturing PMI slipped to 53.3 from 54.
Warsh nevertheless said inflation remains elevated and reaffirmed the Fed’s commitment to its 2% target, as markets continued to price in at least one rate rise by year-end, which could limit further dollar losses. Geopolitical risks also stayed in focus after US-Iran indirect talks in Doha ended without progress towards a lasting peace despite tensions around the Strait of Hormuz, while Russia launched missiles and drones at Kyiv early Thursday. In Europe, softer Eurozone inflation data for June reduced the perceived risk of an ECB rate increase in July, and traders looked to the US Nonfarm Payrolls report for direction on Fed policy.
Current Price Action and Diverging Central Bank Policy
We are watching the EUR/USD pair attempt to move higher toward 1.0900 on this day, July 2nd, 2026. The US Dollar is softening due to recent economic reports suggesting a cooling labor market and easing manufacturing activity. This gives the Euro some breathing room for now.
The market continues to anticipate Federal Reserve rate cuts later this year, with the CME FedWatch Tool showing over a 65% chance of at least one cut by December. However, Fed Chair Jerome Powell has consistently reiterated that with core inflation still sticky around 2.8%, the battle is not yet won. This caution from the Fed should provide a floor for the dollar, preventing a complete collapse.
In contrast, the European Central Bank seems more prepared to ease policy, having begun its rate-cutting cycle back in June 2024. With Eurozone inflation hovering near 2.5%, the ECB has more justification to lower rates further than its American counterpart. We believe this policy divergence will ultimately cap any major, sustained rallies in the EUR/USD.
Range-Bound Outlook, Volatility, and Key Risks
Given these conflicting signals, we expect the pair to be caught in a range ahead of the week’s key data. Historical volatility in EUR/USD is currently near multi-year lows, which makes option premiums relatively cheap. Therefore, we are looking at buying straddles before this Friday’s US Nonfarm Payrolls (NFP) report to capitalize on a potential breakout in either direction.
We must also not ignore the background noise from geopolitical tensions in the Middle East and Eastern Europe, which could trigger a sudden flight to the safety of the US Dollar. The upcoming NFP report is the most critical near-term catalyst. A surprisingly strong jobs number would likely push back rate cut expectations and strengthen the dollar, while a weak print would reinforce the case for easing.
