Manufacturing activity in the U.S. is expected to expand in August, with economists forecasting the ISM index to increase to 50.5 from 48.9 in July, and the data may drive the dollar higher as the outlook for future growth improves.
Trading the News: U.S. ISM Manufacturing
What’s Expected
Time of release: 09/01/2009 14:00 GMT, 10:00 EST
Primary Pair Impact : EURUSD
Expected: 50.5
Previous: 48.9
Impact the U.S. ISM Manufacturing has had on EURUSD over the last 2 months
July 2009 U.S. ISM Manufacturing
| The ISM manufacturing index increased to an 11-month high of 48.9 in July amid expectations for a rise to 46.5, and the data encourages an improved outlook for future growth as firms scale back on production at a slower pace in the second half of the year. The breakdown of the report showed new export orders expanded in July, with the employment component rising to 45.6 from 40.7, while the index of new orders jumped to 55.3 from 49.2 in June. As growth prospects improve, investors anticipate the Federal Reserve to tighten policy over the next 12 months, and long-term expectations for higher interest rates may drive the dollar higher going into 2010 as policy makers anticipate economic activity to improve throughout the second half of the year. However, the FOMC make keep borrowing costs at the record-low for ‘sometime’ in order to foster a sustainable recovery, and the rise in risk appetite may weigh on the exchange rate as investors move into higher yielding assets. | |
June 2009 U.S. ISM Manufacturing
| Manufacturing in the U.S. contracted at a slower pace in June, with the ISM index advancing to a 10-month high of 44.8 from 42.8 in May, and economic conditions may improve throughout the second half of the year as a result of the expansion in monetary and fiscal policy. A deeper look at the report showed export orders increased to 49.5 from 48.0 in May, with the employment component jumping to 40.7 from 34.3, while the production index jumped to 52.5 from 46.0, which is the highest reading since January 2008. At the same time, the gauge for inventories slipped to 30.8 from 32.9 to mark the lowest reading since 1982, while new orders contracted from the previous month, and businesses may continue to scale back on production and employment they face fading demands from home and abroad. |
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What To Look For Before The Release
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
| Bullish Scenario:
If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release. | Bearish Scenario: |
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Manufacturing activity in the U.S. is expected to expand in August, with economists forecasting the ISM index to increase to 50.5 from 48.9 in July, and the data may drive the dollar higher as the outlook for future growth improves. The final GDP reading showed economic activity slipped at an annual rate of 1.0% in the second quarter amid expectations for a 1.5% contraction, and the extraordinary ordinary efforts taken on by the government should continue to stabilize the ailing economy as the Federal Reserve holds the benchmark interest rate at the record-low and commits $1.75T in asset purchases to stem the downside risks for growth and inflation. A report by the Commerce Department showed demands for durable goods jumped 4.9% in July to mark the biggest rise since July 2007, while factor orders unexpectedly rose for the third consecutive month in June, and firms may ramp up their rate of production going into 2010 as policy makers anticipate the growth rate to expand at an annual rate of 2.1 to 3.3 percent in the following year. Moreover, business inventories slumped for the tenth month in June, while the capacity utilization rate bounced back from a record-low in July, and the rebound in factory production is likely to push the ISM index higher as firms replenish their stockpiles of unsold goods. At the same time, the retail spending unexpectedly tipped lower in July, while chain-store sales plunged at an annual pace of 5.0% during the same period to weaken for the twelfth consecutive month in July, and the data reinforces a weakening outlook for private-sector spending as households face fading demands for employment paired with tightening credit conditions. Nevertheless, as the FOMC hold an enhanced outlook for growth and inflation, and forecasts the world’s largest economy to expand over the next two-years, manufacturing activity may increase throughout the remainder of the year as trade conditions improve. Moreover, Fed Chairman Ben Bernanke stated that the “prospects for a return to growth in the near term appear good,” but went onto say that the recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels” as businesses continue to take steps to lower their cost structure. As a result, the Fed continued to reiterate borrowing costs will stay ‘exceptionally low’ for sometime and maintained its asset purchase scheme to steer the nation out of recession however, as policy makers anticipate economic activity to improve over the coming months, the rise in the interest rate outlook may drive the greenback higher as investors anticipate the central bank to tighten policy over the next 12 months. Nevertheless, as risk trends continue to dictate price action in the foreign exchange market, a rise in risk appetite could weigh on the reserve currency as investors move into higher yielding assets.
Trading the given even risk favors a bullish outlook for the greenback as economists anticipate manufacturing to expand in July, and price action following the release could set the stage for a long dollar trade as growth prospects improve. Therefore, if the ISM index rises to 50.5 or higher from the previous month, we will look for a red, five-minute candle following the release to generate a short entry on two-lots of EUR/USD. Once these conditions are met, we will place our initial stop at the nearby swing high (or a reasonable distance), and this risk will establish our first objective. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches our target in order to preserve our profits.
In contrast, the slump in household spending paired with fears of slower recovery may lead firms to turn increasingly pessimistic towards the economy, and a dismal ISM report could weigh on the exchange rate as investors weigh the outlook for future policy. As a result, if the index unexpectedly falls to 45.0 or lower in July, we will favor a bearish forecast for the greenback, and will follow the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse.
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