Trading the News: U.S. ISM Manufacturing
What’s Expected:
Time of release: 11/01/2011 15:00 GMT, 10:00 EST
Primary Pair Impact: EURUSD
Expected: 51.8
Previous: 50.8
DailyFX Forecast: 52.0 to 53.0
Why Is This Event Important:
The U.S. ISM Manufacturing index is expected to increase to 51.8 in November and the faster rate of production could foster a bullish outlook for the greenback as it dampens the scope of seeing another large-scale asset purchase program. As the economic recovery picks up, we should see the FOMC carry its current policy into the following year, and the central bank may show an increased willingness to conclude its easing cycle as the risk of a double-dip recession ease. However, as the slowdown in the global economy dampens the outlook for future growth, Fed Chairman Ben Bernanke may continue to cast a dovish outlook for monetary policy, and the central bank may take additional steps to encourage private sector activity as it aims to encourage a sustainable recovery.
Recent Economic Developments
The Upside
|
Release |
Expected |
Actual |
|
Consumer Confidence (NOV) |
44.0 |
56.0 |
|
Personal Income (OCT) |
0.3% |
0.4% |
|
Consumer Credit (SEP) |
$5.150B |
$7.386B |
The Downside
|
Release |
Expected |
Actual |
|
Personal Spending (OCT) |
0.3% |
0.1% |
|
Personal Consumption (3Q S) |
2.4% |
2.3% |
|
Gross Domestic Product (Annualized) (QoQ) (3Q S) |
2.0% |
2.5% |
The rebound in consumer confidence paired with the expansion in private sector credit may encourage businesses to increase their output, and a positive development could spark a reversal in the EUR/USD as the fundamental outlook for the world’s largest economy improves. However, the recent weakness in household spending paired with the slowdown in economic activity may push firms to keep a lid on production, and we may see the Fed keep the door open for QE3 given the ongoing slack within the real economy. In turn, a dismal ISM report could spark a bearish reaction in the greenback, and the rebound in the EUR/USD may gather pace over the near-term as market participants increase bets for additional monetary support.
Potential Price Targets For The Release
Indeed, projections for a faster rate of production instills a bullish outlook for the greenback, and the market reaction to the ISM report may pave the way for a long U.S. dollar trade as growth prospects improve. Therefore, if the index advances to 51.8 or higher in November, we will need a red, five-minute candle following the release to establish a sell entry on two-lots of EUR/USD. Once these conditions are met, we will place the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate our first target. The 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 mark in an effort to protect our profits.
In contrast, the slowdown in private sector consumption paired with fears of a double-dip recession may bear down on business sentiment, and we may see firms scale back on production as the central bank maintains a cautious outlook for the real economy. As a result, should the ISM index falls back from the previous month, we will implement the same strategy for a long euro-dollar trade as the short position mentioned above, just in the opposite direction.
Impact that the U.S. ISM Manufacturing report has had on USD during the last month
|
Period |
Data Released |
Estimate |
Actual |
Pips Change (1 Hour post event ) |
Pips Change (End of Day post event) |
|
OCT 2011 |
11/01/2011 14:00 GMT |
52.0 |
50.8 |
+20 |
+49 |
October 2011 U.S. ISM Manufacturing
|
Manufacturing in the world’s largest economy unexpectedly expanded at a slower pace in October, with the ISM index falling back to 50.8 from 51.6 in the previous month. Nevertheless, the breakdown of the report showed the gauge for production easing to 50.1 from 51.2, with the employment component slipping to 53.5 from 53.8, while new orders increased for the first time since June. As the slowing recovery heightens the risk of a double-dip recession, the FOMC may keep the door open to conduct another round of quantitative easing, but there appears to be a growing rift within the committee as Fed officials expect the recovery to gradually gather over the coming months. The greenback struggled to hold its ground following the dismal report, with the EUR/USD tagging 1.3700, but we say the reserve currency consolidate throughout the North American trade as the exchange rate closed at 1.3698. |
 |
--- Written by David Song, Currency Analyst
To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong
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