The EUR/USD pair weakened to around 1.0730, snapping a three-day winning streak during the early European session on Thursday. Despite recent gains, the pair faces limited upside as investors grow increasingly concerned about political uncertainty in the Eurozone. Market participants are now turning their attention to the preliminary Purchasing Managers Index (PMI) data for both the Eurozone and the US, set to be released on Friday.

Political developments in the Eurozone have dampened investor sentiment. The call for a snap election in France, following a defeat by the far-right National Rally, has heightened fears of political instability. This uncertainty has put pressure on the Euro, as investors worry about potential disruptions in the region’s economic policies and governance.

Adding to the Euro’s challenges is the divergence in monetary policy between the Eurozone and the US. On Wednesday, European Central Bank (ECB) Governing Council member Mario Centeno indicated that the ECB could further ease monetary policy if inflation continues to moderate. This dovish stance suggests that the ECB might be more inclined to lower interest rates or implement other measures to stimulate the economy, potentially weakening the Euro further.

In contrast, the US is grappling with its own economic signals. A recent weaker-than-expected US Retail Sales report pointed to subdued consumer activity, strengthening the case for potential US Federal Reserve (Fed) rate cuts later this year. This prospect could weaken the US Dollar in the near term, offering some support to the EUR/USD pair. However, the downside for the Greenback may be limited by the hawkish tone from several Fed officials. 

Boston Fed President Susan Collins recently cautioned that it is still too early to determine whether inflation is moving towards the Fed’s 2% target. Similarly, Richmond Fed President Thomas Barkin stated that he needs several more months of economic data before considering a rate cut. These statements suggest that the Fed is not in a hurry to lower rates, which could keep the Dollar relatively strong.

Investors will closely monitor the upcoming PMI data for further clues on economic conditions in both regions. Strong PMI figures from the Eurozone could alleviate some concerns and provide a boost to the Euro. Conversely, robust US PMI data might reinforce the Fed’s cautious stance, maintaining support for the Dollar. The interplay of these factors will likely continue to influence the EUR/USD pair’s performance in the near term, as market participants navigate through the prevailing political and economic uncertainties.