US Manufacturing Escapes Contraction – EUR/USD, USD/JPY Up

ISM Manufacturing PMI slid to 50.6 points, much higher than a drop to 48.7 points that was expected. The escape from falling under 50 points means that the US manufacturing sector is still growing, and reduces the chances for QE3. EUR/USD rises on risk appetite. USD/JPY moves up. The big event is still ahead of us, hence the limited moves.

Last month saw a dramatic dip from 55.3 to 50.9 points. This meant that the manufacturing sector hardly grew. One point of light was seen in this report – the employment component was still relatively high. Also now in August, the employment component remained in the growth zone, at 51.7 points. This is a positive sign towards the Non-Farm Payrolls.

Update: EUR/USD changes course and is now falling. It currently holds to support at 1.4220. Next support is at 1.4160, followed by 1.41. Weak resistance is at 1.4282.

It’s important to remember that the US economy is more services oriented, so this doesn’t paint the full picture of the economy towards the release of the Non-Farm Payrolls.

Earlier today, weekly jobless claims fell to 409K. This was within expectations and also in the same range seen in the last few months. Quarterly Non-Farm Productivity was revised from a drop of 0.4% to a drop of 0.7%. As lower productivity actually means higher wages and inflationary pressures, this could be seen as dollar positive.  Both releases left the dollar unchanged.

Tomorrow is the big day: This release of Non-Farm Payrolls is critical for the FOMC decision on QE3 (or other easing tools. See the NFP Preview for details.

This should be a “normal” event for the dollar across the board – meaning that a good figure will boost it against everybody, while a bad figure will weaken it against everybody, due to the proximity of the QE3 decision.

The initial rise in the reaction to the Manufacturing PMI release is somewhat surprising, and I expect EUR/USD to weaken later on.