• 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.”