- The US ISM Manufacturing PMI is expected to be at 47.7 in September, improving further after the June low.
- The ISM Prices Paid Index and Employment Index could provide clues about the Federal Reserve’s next steps.
- The risk of a EUR/USD corrective advance increases as the pair has fallen for 11 consecutive weeks.
On Monday, October 2, the Institute for Supply Management (ISM) will release the US Manufacturing Purchasing Managers’ Index (PMI) for September. The index is expected to rise slightly to 47.7 points, compared to 47.6 the previous month. The official manufacturing PMI has remained at contraction levels since falling to 49 points in November 2022 and is slowly moving away from the multi-year low recorded last June at 46.
What can we expect from the ISM Manufacturing PMI report?
Beyond the modest rebound in the headline figure, market participants expect an improvement in all subcomponents. The Employment Index is expected to be at 49, up from 48.5 in August, while New Orders will be at 47, down from 46.8 in August. Finally, the ISM Manufacturing Price Index will be at 48.9 in September, which represents an increase of 0.5 points compared to the previous reading.
In August, the report indicated a ninth month of contraction after 30 months of expansion. More relevant, the Price Index registered 48.4, about 5.8 points more than in July (42.6). Inflation in the United States (US), as measured by the Consumer Price Index (CPI), rose more than expected in August, while the underlying Personal Consumption Expenditures (PCE) Price Index – the favorite inflation figure of the Federal Reserve (Fed) -, met expectations while moderating compared to July, with a year-on-year increase of 3.9% in the same month.
A higher-than-expected ISM manufacturing PMI subcomponent, which measures the change in the prices U.S. manufacturers pay for their inputs, would indicate persistently high inflation through September. This should fuel speculation about at least one more rate hike in the US and give support to central banks’ idea of ”higher for longer” rates. Consequently, the risk of an economic downturn should increase, and the Dollar would benefit from a continued move towards the safe haven.
Investors will also pay attention to the employment-related subcomponent ahead of the nonfarm payrolls (NFP) report scheduled for Friday. The tightness of the US labor market is a critical factor in making monetary policy decisions, as it allows the central bank to maintain restrictive policy. Those responsible for monetary policy observe slight signs of relaxation in the labor market, but not enough to change the course of current monetary policy.
Offering a preview of the US data, BBH analysts noted: “ISM PMIs will also be important. Manufacturing PMI will be reported on Monday with the headline expected at 47.9 versus 47.6 in August. There is no “We have to lose sight of employment and prices paid, which stood at 48.5 and 48.4 in August, respectively.”
When will the ISM Manufacturing Purchasing Managers Index be reported and how could it affect EUR/USD?
The ISM Manufacturing PMI report is scheduled to be released on October 2 at 14:00 GMT. Pending this data, the US dollar is trading near multi-month highs against most of its major rivals, supported by growing risk aversion and signs of resilience in the US economy.
An optimistic data should confirm that the economy is still strong enough and that the country could avoid a recession. This speculation should lift spirits and put pressure on the dollar, at least in the short term.
However, strong subcomponents such as Inflation and Employment could spur speculation about longer-term tightening by the Fed and boost demand for Dollars amid fresh fears.
From a technical point of view, Dhwani Mehta, chief analyst for the Asian session at FXStreet, notes that “EUR/USD is struggling below the 1.0600 level on its way to recovery, while the Relative Strength Index (RSI) 14-day period continues below the 50 level.
“Any recovery will gain strength with a sustained move above the psychological level of 1.0650, above which the round level of 1.0700 will be on investors’ radar. Meanwhile, powerful support lines up near 1.0490, below which a new pullback will open towards the level of 1.0400.”
US Dollar FAQ
What is the US Dollar?
The United States Dollar (USD) is the official currency of the United States of America, and the “de facto” currency of a significant number of other countries where it is in circulation alongside local banknotes. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, equivalent to an average of $6.6 trillion in daily transactions.
After World War II, the USD took over from the pound sterling as the world’s reserve currency.
How do the decisions of the Federal Reserve affect the Dollar?
The single most important factor influencing the value of the US Dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: achieve price stability (control inflation) and promote full employment. Your main tool to achieve these two objectives is to adjust interest rates.
When prices rise too quickly and inflation exceeds the 2% target set by the Fed, the Fed raises rates, which favors the price of the dollar. When Inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the Dollar.
What is Quantitative Easing and how does it influence the Dollar?
In extreme situations, the Federal Reserve can also print more dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a clogged financial system. This is an unconventional policy measure used when credit has dried up because banks do not lend to each other (for fear of counterparty default). It is a last resort when a simple lowering of interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE usually leads to a weakening of the US Dollar.
What is quantitative tightening and how does it influence the US dollar?
Quantitative tightening (QT) is the reverse process by which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the principal of maturing portfolio securities in new purchases. It is usually positive for the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
