US PMI expected to show moderate growth as recession fears ebb

The S&P Global preliminary PMIs for August are seen little changed from previous readings.
Economic activity surveys are unlikely to affect the Federal Reserve’s upcoming decisions.
EUR/USD is building a long-term bullish trend, but a downward correction is on the table.

S&P Global will publish the preliminary estimates of the United States (US) Purchasing Managers Indexes (PMIs) for August on Thursday. The indexes are the result of surveys of the senior executives in the private sector and are meant to indicate the overall health of an economy, providing insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment, and inventories.

S&P Global releases three indexes: The Manufacturing PMI, the Services PMI, and finally, the Composite PMI, which is a weighted average of the two sectors. Readings above 50 indicate expansion, while figures below it represent economic contraction.

Since March 2023, the services sector has remained within expansionary levels while manufacturing has struggled to expand. For what it’s worth, the final July figures showed the Services PMI at 55, while the manufacturing index hit 49.6.

“The US service sector began the second half of the year as it ended the first, seeing a marked expansion of business activity in July on the back of a rise in new orders. Growth of new business also encouraged firms to take on extra staff, as did positive expectations for the future,” the official report reads.

What can we expect from the next S&P Global PMI report?

Financial markets expect a modest downtick in the August Services PMI, foreseen at 54, while the manufacturing index is expected to hold steady at 49.6. As a result, the Composite PMI is forecast to ease to 53.5 from 54.3 in July.

Investors will closely monitor the figures, as concerns about the US recession are still pending in the back. Following the release of the July Nonfarm Payrolls (NFP) report, speculative interest feared a steeper economic setback and even rushed to price in an out-of-schedule rate cut before the September meeting. Concerns cooled afterwards, as macroeconomic data showed the US economy remains resilient. However, any surprise in growth-related figures could lead to a sharp shift in sentiment, as the focus is on the September Federal Reserve (Fed) monetary policy decision.

The Fed softened its hawkish tone in the July monetary policy meeting, and policymakers started paving the way for a September interest rate cut. Chairman Jerome Powell has long ago indicated that a loosening labor market and easing inflationary pressures were the two main conditions for a rate cut, but never mentioned economic progress. However, the risk of a recession could also lead to a rate cut amid the increasing risks that high rates pose to the economy. Policymakers won’t say so but indeed consider it.

At this point, the Fed is widely anticipated to trim interest rates in the September meeting, and it seems unlikely these PMI figures will affect such a decision. However, they could introduce some near-term noise.

When will the August flash US S&P Global PMIs be released, and how could they affect EUR/USD?

The S&P Global Manufacturing, Services and Composite PMIs report will be released at 13:45 GMT. As said, the figures are expected to show small variations from the final July readings, meaning they would likely have a limited impact on the US Dollar.

Ahead of the release, the EUR/USD pair is trading at its highest level since December 2023, above the 1.1100 mark. The US Dollar’s persistent weakness results from a combination of risk appetite and the belief that the Fed will trim interest rates in September.

According to Valeria Bednarik, FXStreet’s Chief Analyst, “The EUR/USD pair is technically overbought, yet there are no signs of a change in the dominant trend. Upbeat PMI figures could temporarily support the US Dollar, but once the dust settles, market players will resume revolving around the upcoming Fed’s monetary policy decision. In the case of the EUR/USD pair, a corrective decline is now on the table, with supports at 1.1080 and the 1.1000 threshold. The latter should hold to maintain the bullish trend alive.”

Bednarik adds: “EUR/USD faces a strong static resistance level at 1.1140. Once above it, the case for a sustained rally will be firmer, with the 1.1200 mark coming up next.”

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Economic Indicator

S&P Global Manufacturing PMI

The S&P Global Manufacturing Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US manufacturing sector. The data is derived from surveys of senior executives at private-sector companies from the manufacturing sector. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), industrial production, employment and inflation. A reading above 50 indicates that the manufacturing economy is generally expanding, a bullish sign for the US Dollar (USD). Meanwhile, a reading below 50 signals that activity in the manufacturing sector is generally declining, which is seen as bearish for USD.