The Institute for Supply Management (ISM) is scheduled to release the December Manufacturing Purchasing Managers’ Index (PMI) on Monday. The index is a trusted measure of the health of the United States (US) manufacturing sector, closely followed by market players. It is based on a survey conducted by ISM among companies around the US, and the index revolves around the 50 threshold. A reading above the level indicates an expanding manufacturing sector, while a reading below it indicates contraction.
The December ISM Manufacturing PMI is forecast at 48.3, slightly better than the 48.2 posted in November.
What to expect from the ISM manufacturing PMI report?
The November ISM report showed that economic activity in the manufacturing sector remained in contraction territory for the ninth consecutive month, following a two-month expansion that was preceded by twenty-six straight months of contraction. The index declined to 48.2 from 48.7 in October. Key drivers behind the slide were declines in new orders and employment, although production recovered into expansion territory.
The New Orders Index contracted for a third straight month to 47.4, lower than the 49.4 recorded in October. The Production Index in the same period improved to 51.4 from the previous 48.2. Also, the Prices Index remained in expansion, registering 58.5, up from the previous reading of 58, while the Employment Index came in at 44, down from October’s figure of 46.
“The manufacturing sector continues to be weighed down by the unpredictable tariffs landscape,” said Stephen Stanley, chief US economist at Santander U.S. Capital Markets.
Market participants will pay close attention to the employment-related sub-index ahead of the Nonfarm Payrolls (NFP) report, scheduled for release on Friday. The labor market is likely to be at the top of investors’ priorities this week, given its influence on the Federal Reserve’s (Fed) monetary policy decisions.
The headline reading will also be relevant and likely trigger the initial market reaction. A better-than-anticipated outcome, with a reading above the 50 threshold, should boost demand for the US Dollar (USD), as it would both signal economic progress and diminish the odds of upcoming interest rate cuts. The opposite scenario is also valid, with a discouraging result putting pressure on the Greenback and boosting bets for a March interest rate cut.
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 15:00 GMT on Monday. As investors slowly return to their desks from the winter holiday season, the EUR/USD pair maintains its near-term negative tone but holds above the 1.1700 mark. Geopolitical tensions and limited volumes have supported the US Dollar (USD) in the past few days, but not enough to change its bearish bias.
Valeria Bednarik, FXStreet Chief Analyst, notes: “The EUR/USD pair closed November and December in the red, extending its decline in early January. The pair has found near-term buyers around the 1.1700 level, but can pierce it on an upbeat outcome. The ISM Manufacturing PMI, however, needs to print above 50 to provide sustained support for the USD. A slide below the 1.1680 price zone would likely trigger stops and exacerbate the slide, with EUR/USD likely to near the 1.1600 threshold before finding more solid buying interest.”
Bednarik adds: “If the ISM Manufacturing PMI comes below expected and even below the November reading, the USD is likely to edge sharply lower across the FX board. The January 2 high at 1.1765 is the immediate resistance level ahead of the 1.1800 mark. Additional gains could see the pair rallying towards the 1.1860 price zone.”
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 Manufacturing PMI
The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US manufacturing sector. The indicator is obtained from a survey of manufacturing supply executives 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 manufacturing economy is generally expanding, a bullish sign for the US Dollar (USD). A reading below 50 signals that factory activity is generally declining, which is seen as bearish for USD.
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Source: https://www.fxstreet.com/news/ism-manufacturing-pmi-set-to-show-us-factory-activity-remained-in-contraction-at-year-end-202601051000
