EUR/USD Trading the US ISM Non-Manufacturing PMI

The purchasing managers’ index is an important market moving indicator in its own right, and it is also an important indicator for the all-important Non-Farm Payrolls report. This release could be bad and will rock the markets. Here are 5 possible scenarios for this event and the outcome for EUR/USD – not necessarily what you think.

Published on Wednesday at 14:00 GMT.

Indicator Background

The services sector is around three quarters of the US economy. Around 400 purchasing managers from this sector are interviewed about their current expectations. The figures are fresh for the month of July, adding to the importance of this publication.

In the past three months, the results were between 52.8 to 54.6 points, with 53.3 points last month. Score above 50 represent growth, while numbers below mean economic contraction.  

Official expectations currently stand at a small rise to 53.9 points, pointing to slightly stronger growth. But these expectations are likely too optimistic. The PMI for the manufacturing sector was terrible. It has shown a drop to only 50.9 points, much lower than a score of around 55 points that was predicted. At least the employment component remained above 53 points for this report.

So, a lower score of around 53, is more likely given that release.

Sentiment and technical levels

The risk factor dominates the markets. This means that bad US figures cast a shadow on the whole world, pushing the dollar higher against risk currencies such as the euro. The dollar is more stable now, after the debt ceiling has been raised.

The yen and the franc are not risk currencies, and their reaction to US figures is “normal” – better numbers mean a stronger dollar, and weaker numbers mean a weaker one. So why not pick USD/JPY of USD/CHF? The answer is that central banks in both countries are mulling an intervention, especially the BOJ, and this can happen at any time. So, at least for now, it’s better to stay away, and to stay with the euro, remembering that reactions are different these days.

The trend is marginally bearish on EUR/USD, due to the raging debt crisis.

Technical levels, from top to bottom: 1.4650, 1.4550, 1.4450, 1.4375, 1.4325, 1.4282, 1.4230, 1.4160, 1.41, 1.4070, 1.4030, 1.3950, 1.3838 and 1.37.

5 Scenarios

1. Within expectations: 52.5 to 53.5 points: In this case, EUR/USD will shake and can slide, but probably within range.
2. Above expectations: 53.6 to 55 points: An improvement from the previous month will weaken the dollar and help the euro. The pair is likely to rise, with a small chance of breaking higher.
3. Well above expectations: Above 55 points: This scenario doesn’t look real at the moment, and will be a big surprise. Euro/dollar will likely rise, breaking higher.
4. Below expectations: 50.1 to 52.4 points: This scenario has a high probability, and will strengthen the dollar, likely pushing the pair below support.
5. Well below expectations: Below 50 points: a scenario of contraction cannot be ruled out at the current economic climate. In this case, EUR/USD can even challenge a second support level.