EUR/USD: Trading the US ISM Non-Manufacturing PMI

The Non-Manufacturing PMI (purchasing managers’ index) is an important leading indicator which focuses on the non-manufacturing sector of the economy. As the PMI comes out at the beginning of each month, traders look closely at the index for any hint of a market trend.

Here are all the details and 5 possible outcomes for EUR/USD.

Published on Tuesday at 14:00 GMT.

Indicator Background

The PMI is based on a comprehensive survey of purchasing managers in the service sector, who are interviewed about their activity level and current expectations as to how the economy will perform. A reading above 50 indicates that the non-manufacturing sector is growing, while a figure below 50 signifies economic contraction.

The PMI has been on a worrisome downward trend since March 2011, when the index came in at 59.7. The August reading was 52.7, and the forecast for September is a weak 51.3. A reading higher than the forecast would provide some support for the USD against the EUR.

Sentiment and technical levels

Recent economic figures have been sluggish for both the US and Euro zone economies. Unemployment in the US remains  stuck at  9.1%, while the Greek debt crisis threatens to spiral out of control and cause havoc in Europe. However, the dollar has shown some stability of late, despite an array of weak figures for the US economy.

Thus the trend is marginally bearish on EUR/USD prior to this release.

Technical levels, from top to bottom: 1.4330, 1.4282, 1.4220, 1.41.60, 1.4100, 1.4030 and 1.3950.

5 Scenarios

1. Within expectations: 50.5 to 52.0 points: In this case, EUR/USD may fluctuate slightly within range, with a small chance of breaking higher.
2. Above expectations: 52.1 to 53.0 points: A better reading than forecast will reverse the recent downward spiral of the PMI and help the dollar gain against the euro. The pair is likely to drop, with small chance of  breaking below one support level.
3. Well above expectations: Above 53.0 points: The chances of such an outcome are low. Such a scenario would push down the EUR/USD, and a second support level might be broken as a result.
4. Below expectations: 49.5 to 50.4 points: A smaller than forecast gain, or a contraction below the 50.0 level, would likely push the pair up and break one resistance level.
5. Well below expectations: Below 49.5 points: a reading indicating sharp economic contraction is not likely, but cannot be ruled out in the current economic climate. In this case, EUR/USD can even challenge a second resistance line.

For more about the Euro, see the EUR/USD forecast.