Key Moments
- EUR/USD eases to around 1.1215 in early Asian trade on Friday, with downside cushioned by hawkish European Central Bank rhetoric.
- ECB officials signal the likelihood of further rate tightening, while euro-area inflation swaps and U.S. inflation swaps both retreat to two-month lows.
- Markets await U.S. September Nonfarm Payrolls, with expectations for a 65,000 job gain and a 4.2% Unemployment Rate, to refine the Federal Reserve rate outlook.
Euro Under Pressure Ahead of U.S. Labor Data
The EUR/USD pair softens to around 1.1215 in early Asian dealings on Friday, weighed by a cautious market tone. Despite the pullback, losses for the common currency may be tempered by a firm hawkish stance from the European Central Bank (ECB). Market participants are focused on the upcoming U.S. September jobs report later on Friday for fresh direction on the pair.
ECB Governing Council member Joachim Nagel stated on Tuesday that the central bank will probably raise borrowing costs next month in response to a deteriorating inflation outlook. In parallel, ECB policymaker Klaas Knot indicated that the institution will likely need to maintain a hawkish posture and remain alert to potential inflation shocks. Economists anticipate a final rate increase next month, while markets are pricing in ongoing tightening beyond that, into 2027.
Fed Expectations Shift as U.S. Yields Decline
Lower U.S. Treasury yields are exerting pressure on the U.S. Dollar and could offer some support to EUR/USD. The two-year Treasury yield, often seen as closely tied to interest rate expectations, declined about 10 basis points to 4.47% overnight.
The move in the bond market coincided with a recalibration of expectations for Federal Reserve policy. Fed funds futures reduced the implied probability of a 25 basis point rate hike in December to around 70% from more than 70.9% on Thursday, according to the CME FedWatch tool.
Traders are now looking to Friday’s U.S. labor market figures to refine their view of the Fed’s policy trajectory. Economists foresee Nonfarm Payrolls (NFP) rising by 65,000 jobs in September, with the Unemployment Rate expected to remain unchanged at 4.2% over the same period.
“Recent data suggests improvement in the labor market, and we expect that to continue with this report,” said MUFG analysts, referring to the non-farm payrolls data.
Eurozone Inflation Swaps Fall as CPI Meets Expectations
Analysts at Deutsche Bank highlight that a relatively light data calendar still produced a key signal on price dynamics with the publication of the Euro Area flash CPI print for October. They note that the figure “came in as expected by the consensus, with headline inflation up to a 3-year high of +4.0% in October, whilst core inflation remained at +2.5%.”
Deutsche Bank points out that this release was accompanied by a notable adjustment in short-term inflation expectations. According to their commentary, “that led to a huge decline in inflation expectations, with the Euro 1yr inflation swap (-25.9bps) down to a two-month low of 3.10%, whilst the 1yr US inflation swap (-24.9bps) hit a two-month low of 2.16%.”
European Rates Rally and Spreads Tighten
On the rates front, Deutsche Bank observes that the drop in inflation swaps aligned with a strong advance in European sovereign bonds. They report that “yields on 10yr bunds (-5.8bps) fell to 3.27%, whilst 10yr OATs (-17.6bps) saw their biggest daily decline since April, falling to 4.77%.”
The bank adds that this move also narrowed core-periphery spreads: “that also pushed the Franco-German 10yr spread down by -11.8bps to 150bps, marking its tightest level in the last couple of weeks.”
| Instrument | Move (bps) | Resulting Level | Comment |
|---|---|---|---|
| Euro 1yr inflation swap | -25.9 | 3.10% | Two-month low |
| U.S. 1yr inflation swap | -24.9 | 2.16% | Two-month low |
| 10yr Bund yield | -5.8 | 3.27% | European sovereign rally |
| 10yr OAT yield | -17.6 | 4.77% | Biggest daily decline since April |
| Franco-German 10yr spread | -11.8 | 150 bps | Tightest in recent weeks |
Lagarde’s Tone Reinforces Hawkish Bias
ECB President Christine Lagarde’s latest remarks are assessed as leaning hawkish, with her speech scoring 6.2/10 on the FXS Speechtracker, above the historical average of 5.6/10 and signaling a somewhat more impactful and restrictive tone. The speech underlined that it is “still necessary to apply tools to avoid inflation running away” and emphasized that shocks remain difficult to disentangle, suggesting an ECB bias toward maintaining tight policy despite ongoing uncertainty around supply and demand dynamics.
Lagarde’s comments that U.S. tariffs are unlikely to be revisited quickly and that U.S. mid-term votes may influence trade only gradually underscore a cautious view on external risks, with possible consequences for the Euro through growth and trade channels. The reference to the energy shock and AI pulling in opposite directions illustrates a complex backdrop in which the ECB is likely to remain vigilant, supporting a mild upside bias for the Euro as markets price in its continued focus on inflation.
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