EUR/USD pares losses as US Dollar eases after PMI data
- EUR/USD trims losses as the Euro rebounds modestly while the US Dollar eases from intraday highs after PMI data.
- US and Eurozone PMI releases signal a broad-based slowdown, marking the first read since Middle East tensions escalated.
- Traders reassess central bank monetary policy paths as Fed easing bets fade and ECB hike expectations rise.
The Euro (EUR) recovers modestly against the US Dollar (USD) on Tuesday, helping EUR/USD trim part of its earlier losses as the Greenback pulls back slightly from intraday highs following the latest S&P Global Purchasing Managers Index (PMI) release.
At the time of writing, the pair trades near 1.1590, down about 0.20% on the day after hitting an intraday low of 1.1567. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is holding near 99.30 after easing from around 99.50.
The latest PMI releases, the first since the escalation of the Middle East conflict, showed a broad-based slowdown in business activity across both the Eurozone and the United States, reinforcing concerns over a global slowdown.
In the United States, the preliminary S&P Global PMI data showed the Composite PMI fell to 51.4 from 51.9, while the Services PMI dropped to 51.1 from 51.7, with both marking an 11-month low. In contrast, manufacturing remained relatively resilient, with the PMI rising to 52.4 from 51.6.
Earlier in the day, Eurozone PMI data also pointed to a sharp loss of momentum. The Composite PMI declined to 50.5 from 51.9, a 10-month low, while the Services PMI eased to 50.1 from 51.9. Manufacturing offered some support, with the PMI rising to 51.4 from 50.8, its highest level in nearly four years.
Commenting on the data, S&P Global Chief Business Economist Chris Williamson said both surveys highlight growing stagflation risks. He noted that the US data signal “an unwelcome combination of slower growth and rising inflation,” while the Eurozone PMI is “ringing stagflation alarm bells,” as higher energy costs linked to the Middle East conflict push prices higher while weighing on demand and confidence.
The data reinforce the market narrative that the Middle East conflict is starting to weigh on the global economy, complicating the outlook for central banks. As Middle East tensions continue to escalate, markets now expect the Federal Reserve (Fed) to hold rates through 2026, compared to earlier expectations of easing, while fully pricing in two rate hikes from the European Central Bank (ECB), which was previously expected to remain on hold.
ECB Governing Council member Martins Kazaks said on Tuesday, “rate hikes may be needed if inflation spreads from energy,” adding that “bets on two hikes are plausible, we’ll see if it happens.”
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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