• EUR/USD retreats as the US Dollar starts the week on a firmer footing.
• Fed and ECB are expected to keep monetary policy restrictive for now.
• ISM Services PMI points to continued resilience in the US services sector.

The Euro (EUR) trades on the back foot against the US Dollar (USD) on Monday as investors return after the extended US Independence Day weekend. At the time of writing, EUR/USD is trading around 1.1421, down 0.12% on the day.

Trading conditions remain relatively subdued at the start of the week as markets reassess the monetary policy outlook for both the Federal Reserve (Fed) and the European Central Bank (ECB).

Lower Oil prices after last month's interim US-Iran peace deal have eased inflation concerns, reducing pressure on central banks to tighten monetary policy aggressively.

Last week's weaker-than-expected US Nonfarm Payrolls (NFP) report also lowered expectations of a near-term Fed rate hike. At the same time, softer-than-expected Eurozone inflation data reduced the likelihood of another ECB rate increase this year.

ING's Chris Turner said, "A September rate hike from the European Central Bank is now priced with less than a 50% probability, but it is too early for the ECB to sound the 'all-clear' on inflation, given the risk that core inflation could still edge higher over the coming months."

As inflation remains above both central banks' targets, monetary policy is likely to remain restrictive until there is clearer evidence that price pressures are moving sustainably back toward the 2% target.

According to the CME FedWatch Tool, traders are currently pricing in a 56% probability of a rate hike at the September meeting.

As a result, the interest rate differential continues to favor the US Dollar. The Fed's policy rate currently stands at 3.50%-3.75%, compared with the ECB's 2.25% deposit rate.

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is trading around 101.04, rebounding modestly from last week's low of 100.56.

On the data front, the ISM Services Purchasing Managers Index (PMI) came in at 54.0 in June, matching market expectations. While the reading eased from 54.5 in May, it marked the 23rd consecutive month of expansion.