Euro Under Pressure Near 1.16 as Dollar Holds Policy Advantage

The euro remained on the defensive against the U.S. dollar heading into the weekend, with traders keeping EUR/USD close to the 1.16 area after a fresh batch of economic data reinforced the market’s preference for the greenback.

The move was not driven by a single shock headline. Instead, foreign exchange desks were reacting to a widening contrast between softer eurozone activity and a still-resilient U.S. labor market, a combination that has made it harder for euro bulls to rebuild momentum after the pair slipped to multi-week lows late in the week.

Weak Eurozone Data Caps EUR/USD Recovery

Flash business surveys showed eurozone private-sector activity contracting again in May, with the composite reading falling to 47.5 from 48.8 in April. A reading below 50 signals contraction, and the latest figure suggested that the slowdown has broadened beyond isolated pockets of weakness.

The services sector was a particular drag, while manufacturers continued to face pressure from higher input costs and supply disruption. For currency traders, the report revived a familiar euro problem: inflation risks may keep policymakers cautious, but weaker growth reduces the appeal of holding the currency for cyclical upside.

That mix left the euro exposed whenever the dollar found support from U.S. yields or safe-haven demand. EUR/USD attempted to stabilize above 1.16, but rebounds were limited as traders questioned whether the eurozone economy can absorb another phase of elevated energy and borrowing costs without a deeper hit to demand.

Dollar Supported by Fed Repricing

The dollar’s advantage was helped by U.S. labor data showing initial jobless claims at 209,000 for the week ended May 16, slightly below market expectations. Continuing claims edged higher, but the overall message was still one of a labor market that is not weakening fast enough to force a rapid policy pivot.

That matters for the currency market because expectations for U.S. rate cuts have continued to fade. With inflation concerns still linked to energy prices and supply shocks, traders are assigning more weight to a higher-for-longer Federal Reserve path, and some are keeping open the risk of a more hawkish turn if price pressures persist.

The dollar index has benefited from that repricing, with broad support visible against both European and risk-sensitive currencies. The move has not been a disorderly surge, but the dollar has been firm enough to keep EUR/USD sellers active on rallies.

Next Week’s Data Could Decide the Range

The immediate focus now shifts to German consumer confidence, German growth figures and broader business sentiment readings. If those reports confirm that the eurozone slowdown is deepening, the euro may struggle to recover even if the dollar pauses after its recent gains.

For EUR/USD, the 1.16 region has become a key short-term battleground. A sustained break below recent lows would strengthen the case for a deeper correction, while a recovery would likely require either softer U.S. data, lower Treasury yields or clearer evidence that eurozone activity is stabilizing.

Until then, the foreign exchange market is likely to treat euro rebounds cautiously. The dollar continues to hold the policy advantage, and the euro needs more than valuation support to reverse the current late-May pressure.