Euro drops to two-month low as strong US jobs data lifts Greenback

EUR/USD weakens on Friday as the US Dollar (USD) rallies following a stronger-than-expected US Nonfarm Payrolls (NFP) report. At the time of writing, the pair trades around 1.1559, slipping to two-month lows.

Data released by the US Bureau of Labor Statistics showed the economy added 172K jobs in May, well above the market consensus of 85K. April's payroll figures were revised higher to 179K from 115K, while the Unemployment Rate held steady at 4.3%.

In response to the data, the US Dollar Index (DXY) climbed to its highest level since April 7. The index, which tracks the Greenback's value against a basket of six major currencies, trades around 99.80 after rebounding from an intraday low of 99.16 touched earlier in the European session.

The stronger-than-expected labor market data reinforced expectations that the Federal Reserve (Fed) could maintain a restrictive policy stance as officials assess rising inflation risks linked to higher Oil prices. According to the CME FedWatch Tool, traders expect the US central bank to keep rates in the 3.50%-3.75% range over the coming months, while pricing in a 42% chance of a 25-basis-point (bps) rate hike by the December meeting.

The hawkish repricing is also pushing US Treasury yields higher, providing additional support for the Greenback. The benchmark 10-year US Treasury yield jumps 8 basis points (bps) to 4.53% on Friday.

In the Eurozone, traders are nearly certain that the European Central Bank (ECB) will raise interest rates at next week's meeting as policymakers seek to contain inflationary pressures stemming from elevated Oil prices.

However, recent GDP data suggests economic growth is slowing across the bloc. With Europe heavily reliant on imported energy, the ECB may face a difficult trade-off between fighting inflation and supporting growth as stagflation risks build.