Euro hits fresh yearly low as strong US data keeps Fed tightening in play

• EUR/USD extends its decline to a fresh year-to-date low below 1.1300.
• Elevated US Treasury yields and resilient economic data support the Greenback.
• Traders await Eurozone inflation and US Nonfarm Payrolls data on Friday.

EUR/USD extends its decline on Thursday, falling to its lowest level since May 2025 and setting a fresh year-to-date low as the US Dollar remains firmly supported by elevated US Treasury yields and resilient US economic data. At the time of writing, the pair trades around 1.1253, down 0.67% on the day.

The US Dollar Index, which measures the Greenback against a basket of six major currencies, holds near 101.80 after reaching a fresh yearly high of 101.99. The benchmark 10-year US Treasury yield trades around 5.30%, close to the 5.34% peak reached earlier in the day, its highest level since 2002.

The US ISM Manufacturing Purchasing Managers’ Index (PMI) edged down to 54.5 in September from 54.6, missing the 55.0 forecast but staying comfortably above the 50.0 mark that separates expansion from contraction. The Prices Paid Index, however, jumped to 77.9 from 71.1, well above expectations of 72.3.

The US labour market also remains firm. Initial Jobless Claims fell to 197K in the week ending September 26, below the 200K forecast and the previous reading of 198K. The four-week moving average declined to 200K from 202.5K. The data follows Wednesday’s ADP report, which showed that private-sector employment increased by 90K in September, beating expectations of 70K and rising sharply from 36K in August.

The latest figures suggest that the US economy remains strong enough for the Fed to maintain a tight monetary policy stance. However, the CME FedWatch Tool shows that traders see only about a 36% chance that the central bank will raise interest rates at its October meeting after the Fed’s preferred inflation measure showed some moderation.

Core Personal Consumption Expenditures inflation rose 0.2% MoM in August, below the 0.3% forecast, while the annual rate remained unchanged at 3.0%, undershooting expectations of 3.3%. Even so, inflation remains above the Fed’s 2% target, while elevated energy prices keep the risks tilted to the upside as US-Iran negotiations remain deadlocked.

Fed policymakers continue to signal concern about inflation. Kansas City Fed President Jeff Schmid said on Thursday, “Officials have work to do on inflation,” adding that “energy prices are one of the biggest challenges for monetary policy today.” Boston Fed President Susan Collins said, “Economic growth is near trend, if not more than that; labor market near full employment, but inflation is too high.”

On the European side, stronger Eurozone manufacturing activity offers limited support to the Euro (EUR). The final HCOB Manufacturing PMI rose to 52.9 in September from 52.7, reaching its highest level since May 2022.

On the monetary policy front, the European Central Bank (ECB) has raised interest rates twice this year, while markets are pricing in additional tightening as inflation remains elevated. Preliminary data released on Wednesday showed that inflation in several major Eurozone economies accelerated more than expected in September. However, policymakers have also acknowledged downside risks to growth, which could keep the ECB cautious about raising rates aggressively. Traders now turn their attention to Friday’s preliminary Eurozone inflation report and US Nonfarm Payrolls data.