- The US ISM Manufacturing PMI is seen edging a tad higher in September.
- Investors will also follow the ISM Prices index and the Employment index.
- EUR/USD continues to recover shine lost following last week’s lows.
Anticipation is mounting as the Institute for Supply Management (ISM) gears up to unveil the September United States (US) Manufacturing Purchasing Managers Index (PMI) this Wednesday. This crucial report serves as a vital indicator of the health of the US manufacturing sector, while also offering a window into the broader economic outlook.
Key points to keep in mind:
- PMI benchmarks: A reading above 50.0 signals an expanding manufacturing sector, whereas a value below 50.0 indicates contraction.
- Analyst predictions: Experts are forecasting a September PMI of 49.0, marginally above August’s 48.7. Following this slight uptick, the index is still expected to remain within the contraction zone.
- Economic resilience under pressure: While the manufacturing sector remains below the 50.0 threshold, the overall economy’s health has been showing signs of resilience, particularly following the final upward revision of the Q2 GDP Growth Rate. It seems key fundamentals continue to cling to the idea of US “exceptionalism”. This report not only reflects the pulse of the manufacturing sector but also hints at the evolving narrative of the wider economy.
What to expect from the ISM Manufacturing PMI report?
In August, the manufacturing sector gathered some impulse vs. the previous month, although the index has remained in contraction territory since March.
New Orders surge: The New Orders Index rose to multi-month highs of 51.4, signaling that manufacturers are receiving an increasing number of orders.
Declining costs: The Prices Index continued its downward trend in August, retreating for the second month in a row.
Employment gain: The Employment Index rebounded marginally in August, climbing to 43.8, indicative of a slight improvement although still well below the 50 yardstick.
In general, a PMI reading above 50 signals growth in the manufacturing sector, while a reading below that threshold points to contraction. That said, sustained levels above 42.5 percent can still suggest broader economic expansion.
Stronger manufacturing activity tends to support risk assets such as equities as investors gain confidence in growth prospects. At the same time, the US Dollar (USD) may come under pressure as market sentiment improves and capital shifts toward higher-yielding assets. Encouraging signs such as rising new orders and easing price pressure also reinforce the outlook for continued economic expansion.
When will the ISM Manufacturing PMI report be released, and how could it affect EUR/USD?
The ISM Manufacturing PMI report is scheduled for release at 14:00 GMT on Wednesday.
Prior to the data release, EUR/USD has managed to extend its bounce from last week’s troughs, although extra gains appear to hinge on a stronger catalyst.
Pablo Piovano, Senior Analyst at FXStreet, explained that further consolidation in EUR/USD should not be ruled out in the short-term horizon, with the lower end around 1.1570 offering decent contention for now. The loss of that region could prompt the pair to attempt a move to the August base at 1.1391 (August 1).
Piovano also noted that on the upside, the pair faces initial resistance at the 2025 ceiling of 1.1918 (September 17). A break above this level could spark a likely challenge of the 1.2000 threshold.
Piovano added that the constructive outlook is likely to persist as long as the spot trades above its critical 200-day SMA at 1.1169.
He also pointed out that the Relative Strength Index (RSI) hovers around 51, indicating a pick-up in the bullish stance, while the Average Directional Index (ADX) around 14 suggests that the current trend lacks colour.
Economic Indicator
ISM Manufacturing Employment Index
The Institute for Supply Management (ISM) Manufacturing Index shows business conditions in the US manufacturing sector, taking into account expectations for future production, new orders, inventories, employment and deliveries. It is a significant indicator of the overall economic condition in US. The ISM Manufacturing Employment Index represents business sentiment regarding labor market conditions and is considered a strong Non-Farm Payrolls leading indicator. A high reading is seen as positive for the USD, while a low reading is seen as negative.
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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.
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