EUR/USD dropped to a three-session low on Wednesday, with risks of further declines growing amid a confluence of factors including euro zone inflation data, ECB commentary, and shifting yield differentials. Euro zone inflation for June came in at 2.8%, well below the 3.0% estimate and May's 3.2% reading, signaling that disinflation may be gaining traction. This softer inflation print adds to a recent string of lower-than-expected pricing data, reinforcing the notion that the ECB may be nearing the end of its rate hiking cycle. Several ECB officials echoed this sentiment. ECB's Demarco cautioned against rushing further rate hikes, while policymaker Joachim Nagel noted that second-round effects from Germany's energy price surge remain minimal. ECB President Christine Lagarde further tempered rate hike expectations by stating that risks to euro zone inflation and economic growth are now more broadly balanced compared to just a few weeks ago.

Markets responded swiftly, with German 2-year yields

falling and December Euribor futures rallying as investors scaled back ECB rate hike bets. U.S.-German 2-year yield spreads broke below key support near -163bps, hitting levels not seen since September 2025.

Looking ahead, investors will closely watch U.S. employment and inflation data due Thursday. Strong jobs figures and sticky inflation could bolster the dollar and lift U.S. interest rates, increasing the likelihood of a Fed rate hike and pushing EUR/USD lower.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)