Euro holds near three-month highs as Eurozone Flash PMIs beat expectations

• EUR/USD steadies just below three-month highs at 1.1710, on track for a 1% weekly rally.
• Eurozone Flash HCOB PMI's beat expectations in July, while German PMIs showed a mixed picture.
• The US Dollar remains depressed amid the US Treasury's plan to boost bond buybacks.

The Euro (EUR) is trading a few pips below 1.1700 against a depressed US Dollar (USD) on Friday, on track for a more than 1% weekly rally, and with the three-month high of 1.1710 at a short distance. Solid Eurozone business activity figures have improved confidence in the common currency, while the Greenback remains on its back foot since the US Treasury announced a plan to boost buybacks of long-term Treasuries on Wednesday.

Eurozone July’s Flash HCOB Purchasing Managers’ Index (PMI) data revealed that Manufacturing activity accelerated to 52.8 from 51.9 in June against expectations of a mild decline to 51.8. Services activity has remained unchanged, at 51.7, also above the market consensus, which had anticipated a moderate slowdown to 51.5.

Previously, German PMI figures had displayed a mixed picture. Services activity accelerated its contraction to 48.5 in July from 49.8 in June, against expectations of an improvement to 50.1. Manufacturing PMI, on the other hand, rose to a 51-month high of 54.1, from 52.2 in June, beating market expectations of a slight deceleration to 52.0.

US Treasury’s bond buyback plans are weighing on the USD

The US Dollar, on the other hand, remains on the defensive, following the US Treasury’s plan to boost buybacks of long-term Government Bonds, aimed at stemming a sharp rally in yields. The yield for the 30-year Treasury note hit fresh 19-year highs at 5.33% earlier this week, as news that national debt had topped USD 40 trillion prompted bondholders to demand higher compensation.

Strategists at Scotiabank argue that “the Treasury is trying to manage longer-term rates—which have been rising because markets are questioning the Fed’s commitment to inflation fighting and investors are worried about the sustainability of US fiscal policy.” In their view, if higher yields are unable to “fully take the strain from those concerns, the USD will have to,” leaving the Dollar vulnerable as investors reassess both the policy outlook and the fiscal backdrop.