On Thursday, we’ll get the latest read on the US service sector when the Institute for Supply Management (ISM) publishes its August gauge. Consensus points to a marginal improvement to 54.3 from July’s 54.1. If confirmed, the reading would reinforce the sector’s resilience and offer a modest boost to confidence in the broader economy.
Back in July, the details from that release were mixed: hiring momentum weakened, with the ISM Employment Index dropping to 47.4 (from 51.2). On the flip side, New Orders gathered decent steam, increasing to 57.2, which hinted that demand may be picking up pace. In tandem with the steady growth, the Prices Paid Index rose to 70.3, echoing the strengthening momentum of inflation pressures.
What to expect from the ISM Services PMI report?
Inflation in the US is still running hotter than the Federal Reserve’s (Fed) 2% target, and that keeps policymakers uneasy, especially amid the still unresolved crisis in the Middle East and with the full effects of US tariffs yet to filter through the economy.
The inflationary pressure in the US appears to have lost some traction in July, following the small decline in the Consumer Price Index (CPI), while Personal Consumption Expenditures (PCE) readings remained unchanged from a month before. However, Fed officials and Chair Kevin Warsh have been cautious in their latest comments, keeping the issue of (still elevated) inflation on the table and the main source of the recent pick-up in speculation surrounding rate hikes in the second half of the year.
Against that backdrop, an ISM Services PMI that lands in line with expectations probably won’t move the US Dollar (USD) much. It would simply confirm the picture of an economy that’s still resilient but still wrestling with sticky price pressures. A softer-than-expected print, though, could shake confidence and see investors probably trimming their USD holdings on fears that growth is losing momentum.
When will the ISM Services Purchasing Managers Index report be released, and how could it affect EUR/USD?
The Institute for Supply Management (ISM) will publish the Services Purchasing Managers Index (PMI) on Thursday at 14:00 GMT.
Pablo Piovano, Senior Analyst at FXStreet, explains that the near-term outlook for EUR/USD has deteriorated since the recent break below its critical 200-day SMA in the 1.1630 region.
Against that, Piovano argues that there is a provisional support at the 100-day SMA near 1.1570, while a deeper retracement could lead to a test of the minor support at 1.1511 (August 13), ahead of the interim 55-day SMA around 1.1490.
On the flip side, “if the pair manages to reclaim the 200-day SMA, it could then attempt a move toward the August peak at 1.1711 (August 21)”, Piovano adds.
“Momentum indicators also suggest that further pullbacks should remain on the cards, as the Relative Strength Index (RSI) has retreated to the 52 region, while the Average Directional Index (ADX) near 37 suggests that the current trend is quite firm”, he concludes.
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.
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.
About The Author
