EUR/USD advances to near 1.0890 after the mixed Eurozone, German PMI data

• EUR/USD snaps its recent losses after the improved Manufacturing PMI data.
• Eurozone Manufacturing PMI improved to 46.6 from the previous reading of 44.4.
• German Manufacturing PMI reached 45.4 in January from 43.3 prior.
• US Dollar declines as US yields face a challenge on expectations of the Fed to initiate rate cuts from May.

EUR/USD gains ground after the mixed Purchasing Managers Index (PMI) data for the Eurozone and Germany. The EUR/USD pair edges higher to near 1.0880 during the European session on Wednesday. Additionally, the subdued US Treasury yields are contributing to downward pressure for the US Dollar (USD), which in turn, underpins the EUR/USD pair.

In January, the preliminary Eurozone HCOB Services Purchasing Managers' Index (PMI) decreased to 48.4, falling short of the anticipated reading of 49.0. The Manufacturing PMI showed improvement, improving to 46.6 from the previous reading of 44.4. In Germany, the Services PMI declined to 47.6, below the market consensus of 49.5. While the Manufacturing PMI in Germany improved, reaching 45.4 compared to the prior reading of 43.3.

These figures indicate a mixed picture for economic activities in the Eurozone, with the services sector experiencing a decline while manufacturing shows signs of improvement ahead of the European Central Bank’s (ECB) monetary policy statement on Thursday.

The US Dollar Index (DXY) experiences a decline, nearing the 103.20 level, as the 2-year and 10-year yields on US bond coupons stand at 4.31% and 4.09%, respectively, at the time of writing. This movement in the bond market could be suggestive of market expectations that the Federal Reserve (Fed) may initiate rate cuts, with full pricing in of a 25 basis point (bps) cut in interest rates for May.

Adding to this, former St. Louis Fed President James Bullard has put forth a perspective suggesting the possibility of the Fed implementing interest rate cuts even before inflation reaches the 2.0% threshold. Bullard speculates that these cuts could potentially occur as early as March, introducing an alternative timeline for potential monetary policy adjustments.

Looking ahead, the S&P Global Purchasing Managers Index (PMI) data from the United States (US) scheduled for release on Wednesday will be closely observed. This data is significant for providing insights into business activities within the United States and could further influence market sentiments regarding the monetary actions of the Federal Reserve.