- US ISM Services PMI is seen improving a tad in September.
- The US services sector is expected to remain within the expansionary territory.
- Investors continue to favour a soft-landing scenario of the US economy.
The United States is set to release the Institute for Supply Management’s (ISM) Services Purchasing Managers Index (PMI) on Thursday, with the September index expected to tick higher to 51.7 from the previous 51.5.
In August, the economic activity in the United States (US) services sector improved for the second month in a row, showing the sector’s resilience and thus reinforcing the view of a healthy US economy.
Moreover, the ISM Business Activity Index eased to 53.3 in August (from 54.5), suggesting some loss of momentum in business operations, while the ISM Services New Orders Index increased by 1.14 percentage points to 53.0, pointing to stronger demand for services. On a less positive note, the ISM Services Prices Paid Index rose marginally to 57.3 (from 57.0), highlighting still unabated price pressures.
What to expect from the ISM Services PMI report?
Inflation in the US has been on a clear downtrend, allowing the Federal Reserve (Fed) to shift its focus to the domestic labour market when it comes to deciding on future interest rate moves. That said, inflation gauged by the Personal Consumption Expenditures (PCE) Price Index last week reinforced that view. While the core PCE Index remained sticky and rose by 2.7% in the year to August (from the prior month of 2.6%), the headline PCE rose by 2.2%, coming in below consensus and lower than the previous 2.5% increase.
Previewing the release, an ISM Services PMI reading in line with expectations is likely to have minimal impact on the US Dollar (USD), as it would confirm the current market view that a soft landing is totally achievable amidst inflationary pressures, which even remaining above the Fed’s 2% target, are gradually moving in the right direction. A sharper-than-expected decline, however, could have a more significant impact, as the services sector has been a key driver of the economy in recent years. A sudden contraction could wake up risk aversion, threatening the idea of a smooth economic transition and waking up the demand for safe-haven assets like the Greenback.
When will the ISM Services Purchasing Managers’ Index report be released, and how could it affect EUR/USD?
The Institute for Supply Management’s (ISM) Services Purchasing Managers Index (PMI) will be published on Thursday at 14:00 GMT.
According to Pablo Piovano, Senior Analyst at FXStreet, “[T]he continuation of the selling process could initially drag EUR/USD to the 55-day Simple Moving Average (SMA), currently at 1.1024, which comes ahead of the September low at 1.1001 (September 11)”.
Bouts of strength, on the other hand, should motivate the spot to challenge its yearly top of 1.1214 (September 25). Once this region is cleared, the pair could embark on a probable move to the 2023 high of 1.1275 (July 18)”, Pablo adds.
Finally, Pablo suggests that “while above the 200-day SMA of 1.0874, the pair’s constructive outlook should remain unchanged.”
Economic Indicator
ISM Services PMI
The Institute for Supply Management (ISM) Services Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US services sector, which makes up most of the economy. The indicator is obtained from a survey of supply executives across the US based on information they have collected within their respective organizations. Survey responses reflect the change, if any, in the current month compared to the previous month. A reading above 50 indicates that the services economy is generally expanding, a bullish sign for the US Dollar (USD). A reading below 50 signals that services sector activity is generally declining, which is seen as bearish for USD.
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GDP FAQs
A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022. Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.
A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency. When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.
When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.
Source: https://www.fxstreet.com/news/ism-services-pmi-preview-us-services-sector-expected-to-expand-in-september-202410030800