trading news reports

EUR/USD: Trading the U.S. ISM Manufacturing Report

Manufacturing activity in the U.S. is expected to expand at a slower pace in December, with economists forecasting the ISM index to weaken to 55.2 from 55.9 in the previous month, and the data is likely to spark increased volatility in the exchange rate as investors weigh the prospects for a sustainable recovery.

Trading the News: U.S. ISM Manufacturing

What’s Expected
Time of release:        02/01/2010 15:00 GMT, 10:00 EST
Primary Pair Impact :    EURUSD
Expected:         55.2
Previous:         55.9

Impact the U.S. ISM Manufacturing has had on EURUSD over the last 2 months

December 2009 U.S. ISM Manufacturing

The ISM Manufacturing index increased to 55.9 in December to top forecasts for a rise to 54.3, and marked the highest reading since April 2006. The breakdown of the report showed the gauge for new orders climbed to 65.5 from 60.3 in November, with production rising to 61.8 from 59.9, while the employment component bounced back to 52.0 from 50.8 in the previous month. The data encourages an enhanced outlook for the world’s largest economy and business activity is likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. However, the FOMC is widely expected to hold the benchmark interest rate at the record-low throughout the first-half of the year as policy makers aim to encourage a sustainable recovery.

November 2009 U.S. ISM Manufacturing

Manufacturing activity in the U.S. expanded at a slower pace in November, with the ISM index slipping to 53.6 from a three-year high of 55.7 in the previous month, and businesses may keep a lid on production and employment throughout the first-half of the year as policy makers see a risk for a protracted recovery. A deeper look at the report showed new orders surged to 60.3 from 58.5 in October, with export demands increasing to 56.0 from 55.5, while the employment component slipped to 50.8 from 53.1 in the previous month. However, conditions are expected to improve over the coming months as the government takes unprecedented steps to stimulate the economy, and the rebound in global growth may lead firms to ramp up their rate of production as the recovery gathers momentum.

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: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell 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 bearish bias on EURUSD ahead of the data release.

How To Trade This Event Risk

Manufacturing activity in the U.S. is expected to expand at a slower pace in December, with economists forecasting the ISM index to weaken to 55.2 from 55.9 in the previous month, and the data is likely to spark increased volatility in the exchange rate as investors weigh the prospects for a sustainable recovery. Nevertheless, the advanced 4Q GDP report showed economic activity expanded 5.7% from the previous three-month period to mark the fastest pace of growth since the third-quarter of 2003, and conditions are likely to improve going forward as the economy emerges from the worst recession since the Great Depression. Moreover, industrial outputs increased for the sixth consecutive month in December, while the capacity utilization rate advanced to a one-year high of 72%, and businesses may continue to ramp up their rate of production over the coming months as they look to replenish their inventories of unsold goods. However, a report by the Commerce Department showed demands for durable goods increased 0.3% in December, which fell short of expectations for a 2.0% rise, while retail spending unexpectedly contracted 0.3% during the same period, and the slump in private spending may lead firms to keep a lid on production as policy makers continue to see a risk for a protracted recovery.

Meanwhile, the Federal Open Market Committee held the benchmark interest rate at the record-low of 0.25% this month, and reiterated that borrowing costs will stay low for an “extended period” of time as the central bank aims to encourage a sustainable recovery. The Fed stated economic conditions continued to improve and noted that the deterioration in the labor market appears to be “abating,” but expects to see a “moderate” recovery for a time. Moreover, the central bank saw business spending “picking up” even as they remained “reluctant” to expand their labor force, and expects “a gradual return to higher levels of resource utilization” as the expansion in monetary and fiscal policy continues to feed through the real economy. However, MPC member Thomas Hoenig dissented and said that keeping the interest rate at the record-low for an “extend period” period of time was “no longer warranted,” and the central bank may turn increasingly hawkish over the coming months as the recovery continues to gather momentum.

Expectations for a slower expansion in manufacturing could weigh on the greenback as policy makers maintain a cautious outlook for the economy but nevertheless, price action following an enhanced release could set the stage for a long dollar trade. Therefore, if the ISM index rises to 56.2 or higher, we will need to see a red, five-minute candle following the release to confirm a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance, and this risk will determine our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.

On the other hand, firms may keep a lid on production as policy makers continue to see a risk for a protracted recovery, and a dismal ISM report is likely to drag on the exchange rate as investors weigh the prospects for a sustainable recovery in the world’s largest economy. As a result, if the index slips to 55.2 or lower, we will favor a bearish outlook for the greenback, and will implement the same setup for a long euro-dollar trade as the short position laid out above, just in reverse.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

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