This week, the European Central Bank will decide on interest rates, followed by the US CPI data release. In this situation, the euro hopes to advance, while the US dollar expects to hold onto its gains.

At the end of last week, USD increased amid risk-off sentiment in the market. The yield of US Treasury bonds went up as well. The US dollar found support in mostly positive US labor market data. According to the US Labor Department, nonfarm payrolls increased by 390,000 in May, well above the 325,000 estimate. The strong payroll data indicates that the Federal Reserve is likely to continue its monetary tightening cycle. However, the ISM services PMI report fell short of market expectations.

The nonfarm payrolls show that the US labor market remains tight. It would allow the regulator to hike interest rates more aggressively, analysts say.

Although the US dollar has currently retreated slightly against the euro, it is likely to come on top in the long term, thanks to the strong support from recent macroeconomic data. The focus of investor has now shifted to US CPI data for May, which will be released on Friday, June 10. Inflation is expected to increase month-on-month, which would likely force the Fed to acknowledge price pressure.

According to preliminary estimates, annual inflation is expected to remain at 8.3%, while monthly inflation is predicted to increase by 0.7%. The Fed will likely follow its plans to increase interest rates by 0.50% at its next several policy meetings, even if the actual price increase is smaller than expected.

If inflation puts pressure on US consumer demand, it will likely put a 50 basis point rate increase into question. Lael Brainard, vice chair of the Federal Reserve, stated that inflation was the number one challenge for the Federal Reserve, which would make two 0.50% hikes appropriate.

In this situation, EUR/USD failed to overcome 1.0750 and retreated to 1.0700. Early on Monday, EUR/USD recovered slightly and traded at 1.0735, as the euro strengthened against the American currency.

Hopes of an ECB monetary policy adjustments are giving support to the European currency. Market players expect the European Central Bank to increase interest rates at its next meeting on Thursday. The meeting will be followed by a press conference of ECB president Christine Lagarde. The EU regulator is predicted to increase its inflation projections in the run-up to the meeting. Monetary tightening expectations have been fuelled by galloping inflation in the eurozone. An interest rate hike would boost the euro.

Analysts are mixed on the US dollar, with some being skeptical about USD's upside, despite the US dollar index remaining at a 20-year high, which it hit in May. According to George Saravelos, global head of forex research at Deutsche Bank, the US dollar is "pricing a safe-haven risk premium that is so extreme it rarely has persisted over time and is now in the process of unwinding." Bullish analysts, on the other hand, expect the Fed to stay on its tightening course, unlike the more indecisive ECB.