EUR/USD slips to 1.1613 as NFP test looms amid Middle East uncertainty

All eyes on US non-farm payrolls as EUR/USD hovers near 1.16 and the dollar holds safe-haven bids from stalled Middle East peace talks.

The euro slipped to $1.1613 on Friday, heading for a weekly loss, as traders awaited US payrolls data that could cement expectations for a Federal Reserve rate hike while Middle East uncertainty kept safe-haven demand underpinned.

"The situation is likely to remain unstable for the time being, at least until Iran and the US actually strike a deal in their talks," said Kumiko Ishikawa, senior analyst at Sony Financial Group. "That means markets may stay headline-driven and jittery, but reports of incremental progress alone are unlikely to spread a sense of relief."

The dollar index ticked up to 99.19, extending its weekly advance, after Hezbollah rejected a US-backed ceasefire proposal in Lebanon on Thursday, undermining President Donald Trump's efforts to halt fighting and reach a peace deal with Tehran. Brent crude held above $90 a barrel after renewed hostilities between Iranian and US forces this week, while spot gold eased 0.3% to $4,461.28 an ounce as rate-hike expectations challenged safe-haven demand.

Friday's employment report is expected to show a gain of 85,000 jobs in May with the unemployment rate steady at 4.3%, according to a Reuters poll of economists. A stronger-than-expected reading would likely narrow the odds of a Fed rate hike further, while a miss could trigger an unwind of recent dollar gains. Markets are betting the central bank's next move will be to raise its benchmark rate, a sharp reversal from pre-war expectations for a cut when the Iran conflict began on Feb. 28.

Payrolls Data Carries Rate Path Implications

The dollar had rallied at the onset of the conflict, buoyed by safe-haven demand and the US economy's relatively limited exposure to energy-driven inflation, but has given back some of those gains as the conflict's trajectory remained uncertain. The last time nonfarm payrolls exceeded 100,000 — in April, when the economy added 112,000 jobs — the dollar index rose 0.4% on the day while two-year Treasury yields climbed 6 basis points, reinforcing expectations that the Fed would hold rates higher for longer.

Rising energy prices have reshaped the rate outlook entirely. Before the Iran war, markets priced a cut as the Fed's next move. Now, with Brent above $90 and the Strait of Hormuz disruption threatening further supply shocks, the consensus has flipped to a hike. Friday's data will either validate that shift or force a reassessment.

Yen Hovers Near Intervention Threshold

In currency markets, the Japanese yen traded at 159.71 per dollar, close to the 160 level widely seen as a trigger for intervention. Finance Minister Satsuki Katayama said Tuesday the authorities stood ready to respond as needed. "If dollar/yen breaks above 160, the risk of surpassing the April 30 high would increase markedly, raising the likelihood of stronger verbal warnings and a renewed round of rate checks or actual intervention," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

Sterling edged up to $1.3457, while the Australian dollar held at $0.7156. The euro zone's May consumer price index, due later Friday, will provide additional cues on whether the European Central Bank faces its own inflation dilemma from higher energy costs.

This article is for informational purposes only and does not constitute investment advice.