• EUR/USD is rebounding from a two-year low of 1.0332, while the US dollar is retreating after hitting two-year highs on Friday.
• The US dollar may gain in value as the latest US PMI data reinforces the likelihood that the Fed will leisurely the pace of interest rate cuts.
• The euro faced challenges as the latest HCOB PMI data highlighted continued weakness in business activity in the euro zone.

The EUR/USD rate is recovering from the two-year low of 1.0332 recorded on Friday, and is trading near 1.0480 during Monday’s Asian session. This rebound can be linked to the correction in the US dollar (USD), despite solid preliminary S&P Global US Purchasing Managers’ Index (PMI) data released in the previous session.

Meanwhile, the US Dollar Index (DXY), which tracks the US dollar against six major currencies, fell to around 107.00 after hitting a two-year high of 108.07 on Friday. Downside risks to the dollar remain narrow, however, as recent economic data has reinforced expectations that the Federal Reserve (Fed) may leisurely the pace of interest rate cuts.

The S&P Global US Composite PMI rose to 55.3 in November, showing the strongest growth in private sector activity since April 2022. The US Services PMI rose to 57.0 from 55.0 in October and significantly exceeded market expectations of 55 .2, which means the sharpest growth in the services sector since March 2022. Meanwhile, the PMI index for manufacturing in the US increased to 48.8 from 48.5 in October, in line with market forecasts.

The euro came under pressure after PMI data showed continued weakness in business activity in the euro zone. The HCOB Flash Eurozone Composite PMI fell sharply to 48.1 in November, down from 50.0 in October and well below expectations of 50.0. This decline reflects the services sector contracting for the first time in ten months, coupled with the continuing deterioration in manufacturing.

On Thursday, European Central Bank (ECB) Chief Economist Philip Lane warned that a potential global trade war triggered by the expected introduction of higher tariffs imposed by President-elect Donald Trump could lead to significant economic losses around the world. “Trade fragmentation results in significant production losses,” Lane emphasized.

After weaker-than-expected PMI data for the euro zone, the probability of an aggressive interest rate cut by the ECB increased. Market expectations for a 50 basis point (bps) cut in the deposit rate to 2.5% have increased to over 50% compared to less than 20% before the release of the PMI data.