Following a lackluster performance in January, the euro staged a recovery, registering substantial gains against the US dollar, propelled by renewed risk-on sentiment as the Friday session unfolded. The EUR/USD saw early gains on Thursday, fueled by a mixed Eurozone inflation report and a significant contraction in 2-year German-US yield spreads, diminishing the dollar's yield advantage over the euro.

In conjunction with German and French inflation figures, the flash estimate on Thursday revealed a dip in the Eurozone HICP index from 2.9% to 2.8% in January. Core inflation also declined from 3.4% in December to 3.3%. However, caution is warranted before declaring victory in the inflation battle. The European Central Bank (ECB) closely monitors the evolution of core inflation, which is cooling at a slower rate than anticipated, despite reaching its lowest level since March 2022. Risks persistently lean towards the upside, as higher wage agreements could translate into increased selling prices. Both PMI and the European Commission's economic sentiment surveys indicate rising selling price expectations.

Despite the decline in core inflation, the ECB finds some reassurance in the historically tight labor market, with unemployment at 6.4%. This situation allows the ECB to maintain policy rates at current levels until convinced that inflation is truly moving towards the desired 2% target.

With no significant domestic events on the end-of-week calendar, EUR/USD is vulnerable to the impact of the US Non-Farm Payrolls (NFP) report scheduled for later in the day. Federal Reserve Chair Powell's statement on Wednesday emphasized that only sustained weakness in the labor market would prompt the Federal Open Market Committee (FOMC) to consider earlier rate cuts, underscoring the significance of NFP and future job data releases. Consequently, if the US January payrolls signal a softer job market, EUR/USD may rally further to catch up with recent spread tightening.

Despite a more hawkish than expected Bank of England, EUR/GBP experienced minimal changes on the day but is poised to conclude lower for the sixth consecutive week. On the other hand, EUR/CAD slid to a fresh 15-week low, as Canada reported its strongest Purchasing Managers' Index (PMI) readings in the past three months.