The Institute for Supply Management (ISM) is scheduled to release the September Services Purchasing Managers’ Index (PMI) this Friday. The report is a well-trusted measure of business performance in the sector, but it is usually published on the same date as the US Nonfarm Payrolls (NFP) report, which diminishes its relevance.
This time, however, things are different, as the NFP is unlikely to be published due to the ongoing United States (US) government shutdown. The US ran out of funding on Wednesday, not for the first time, nor the last. Among the immediate consequences of a shutdown are the delays and cancellations of data collection and publication, resulting in the country’s inability to provide fresh unemployment figures on Thursday.
As a result, market players are focusing on macro figures offered by independent organizations. The ISM Services PMI is expected at 51.7 in September, slightly lower than the 52 reported in August, although still indicating expansion in the sector.
What to expect from the ISM Services PMI report?
The August ISM Services PMI showed activity grew for the third consecutive month, expanding for the 13th time in the last fourteen months. The report also revealed that the New Orders Index remained in expansion in August, printing at 56, which is significantly better than the 50.3 recorded in July. The Employment Index, however, remained in contraction territory for the third consecutive month, with a reading of 46.5, slightly higher than the previous 46.4. Finally, it is worth noting that the Prices Index registered 69.2 in August, down from July’s reading of 69.9.
Earlier in the week, ISM reported that manufacturing output improved in September, albeit the index remained in contraction territory. The Manufacturing PMI printed at 49.1, following the 48.7 posted in August.
The poor performance of the manufacturing sector is a well-known issue that has persisted since the COVID-19 pandemic. Services businesses, on the other hand, had flourished ever since, balancing the private sector’s overall activity.
Beyond the headline figure, market participants will closely monitor the employment and inflation indexes. The fact that the employment sub-component indicates contraction, as price pressures ease, is a reason for the Federal Reserve (Fed) to keep cutting interest rates. The latest figures reinforced the idea, as the ADP Employment Change survey showed that the private sector lost 32,000 jobs in September and another 3,000 in August.
When will the ISM Services PMI report be released, and how could it affect EUR/USD?
The ISM Services PMI report is scheduled for release at 14:00 GMT on Friday. Ahead of the data release, the EUR/USD pair trades below a weekly peak of 1.1778, struggling to retain the 1.1700 level.”
Valeria Bednarik, FXStreet Chief Analyst, notes: “The EUR/USD pair is in wait-and-see mode, unable to attract investors. The positive momentum has been eroding ever since the pair peaked at 1.1918 in mid-September, while the bearish potential remains well-limited. Given the ongoing uncertainty, the market’s reaction could be limited. An upbeat report won’t be a surprise, providing limited support to the USD. An unexpected discouraging reading, on the contrary, could push EUR/USD initially towards the 1.1770 region, with the next near-term resistance levels at 1.1830 and the aforementioned 1.1918.”
Bednarik warns: “The EUR/USD pair can turn south on a clear break below the 1.1690 mark, the next relevant support is 1.1645, the September 25 low.”
US Dollar FAQs
The US 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 found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
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 in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering 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 in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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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