Another pickup in the ISM Manufacturing survey may garner an improved outlook for the U.S. economy and spark a bullish reaction in the dollar as it puts pressure on the Federal Open Market Committee (FOMC) to normalize monetary policy sooner rather than later.
Even though Fed Fund Futures continue to reflect limited expectations for a March rate-hike, signs of stronger growth may push central bank officials to adopt a more hawkish tone in 2017 especially as the U.S. economy approaches ‘full-employment.’ However, Chair Janet Yellen appears to be in no rush to remove the highly accommodative policy stance as ‘Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance,’ and the FOMC may try to buy more time as the central bank head argues ‘inflation moved up over the past year, mainly because of the diminishing effects of the earlier declines in energy prices and import prices.’
Expectations: Bullish Argument/Scenario
Release
Expected
Actual
Existing Home Sales (MoM) (JAN)
1.1%
3.3%
Building Permits (MoM) (JAN)
0.2%
4.6%
NFIB Small Business Optimism (JAN)
105.0
105.9
Improved business confidence accompanied by the ongoing expansion in the housing market may generate another uptick in the ISM Manufacturing survey, and a positive development may heighten the appeal of the U.S. dollar as it boosts interest-rate expectations.
Risk: Bearish Argument/Scenario
Release
Expected
Actual
Gross Domestic Product (Annualized) (4Q P)
2.1%
1.9%
Advance Goods Trade Balance (JAN)
-$66.0B
-$69.2B
Durable Goods Orders ex. Transportation (JAN P)
0.5%
-0.2%
Nevertheless, narrowing demand for large ticket-items paired with the widening trade deficit may drag on business sentiment, and a weaker-than-expected print may produce near-term headwinds for the greenback as it encourages the FOMC to preserve a wait-and-see approach at the next interest rate decision on March 15.
EUR/USD may continue to retrace the decline from earlier this month as it appears to be breaking out of the downward trending channel, with the Relative Strength Index (RSI) highlighting a similar dynamic, but the series of failed attempts to close above the 1.0600 (23.6% expansion) hurdle may spur a move back towards the February low (1.0494), with the broader outlook tilted to the downside amid the deviating paths for monetary policy.
Interim Resistance: 1.0880 (61.8% expansion) to 1.0910 (38.2% expansion)
Interim Support: 1.0340 (2017-low) and 1.0370 (38.2% expansion)
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Impact that the ISM Manufacturing survey has had on EUR/USD during the previous release
Period
Data Released
Estimate
Actual
Pips Change
(1 Hour post event )
Pips Change
(End of Day post event)
JAN
2017
02/01/2017 15:00 GMT
55.0
56.0
-3
+10
January 2017 U.S. ISM Manufacturing
EUR/USD 5-Minute
EUR/USD Chart
The ISM Manufacturing survey climbed to 56.0 from a revised 54.5 in December to mark the highest reading since 2014. A deeper look at the report showed the Employment component advancing to 565.1 from 52.8 during the same period, with the gauge for Production climbing to 61.4 from 59.4, while New Export Orders narrowed to 54.5 from 56.0 in December. Despite the better-than-expected ISM print, the market reaction was short-lived, with EUR/USD bouncing back from 1.0736 to end the day at 1.0768.
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