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EURUSD: Trading the U.S. ISM Manufacturing Report

By , Currency Strategist  and  , Currency Analyst
01 March 2012 09:00 GMT

Trading the News: U.S. ISM Manufacturing

What’s Expected:

Time of release: 03/01/2012 15:00 GMT, 10:00 EST

Primary Pair Impact: EURUSD

Expected: 54.5

Previous: 54.1

DailyFX Forecast: 55.0 to 57.5

Why Is This Event Important:

Manufacturing in the world’s largest economy is expected to expand at a faster in February and an uptick in the ISM survey could spark a bullish reaction in the U.S. dollar as the data dampens the prospects for another round of quantitative easing. As the recovery gathers pace, we should see the Federal Reserve continue to soften its dovish tone for monetary policy, and the central bank may endorse a wait-and-see approach throughout 2012 as growth and inflation pick up.

Recent Economic Developments

The Upside

Release

Expected

Actual

Richmond Fed Manufacturing Index (FEB)

14

20

Dallas Fed Manufacturing Activity Index (FEB)

15.8

17.8

Empire Manufacturing Index (FEB)

15.00

19.53

The Downside

Release

Expected

Actual

Durables Goods Orders (JAN)

-1.0%

-4.0%

Advance Retail Sales (JAN)

0.8%

0.4%

Trade Balance (DEC)

-$48.5B

-48.8B

The ongoing expansion in private sector activity certainly bodes well for the ISM survey, and a rise in the manufacturing index could fuel the short-term reversal in the EURUSD as market participants scale back bets for QE 3. However, the slowdown in household consumption paired with weakness in global trade may prompt business to scale back on production, and a dismal manufacturing report could heighten expectations for additional monetary support as the central bank aims to encourage a stronger recovery. In turn, the recent weakness in the EURUSD could be short-lived, and we may see the exchange rate track higher over the remainder of the week as it maintains the upward trending channel from earlier this year.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._ISM_Manufacturing_Report_body_EUR_DAILY_0229.png, EURUSD: Trading the U.S. ISM Manufacturing Report

A look at the encompassing structure of the euro sees the single currency coming up on critical support at the confluence of former support dating back to January 10th 2011, the 100-day moving average, and the key 61.8% Fibonacci extension taken from the October 4th and January 13th troughs at the 1.33-handle. A move below this level risks substantial losses for the single currency with subsequent daily support targets seen at the convergence of channel support and the 50% extension around 1.3170. Topside resistance holds with the 78.6% extension at 3.3480.

EURUSD_Trading_the_U.S._ISM_Manufacturing_Report_body_EURO_SCALP_02.png, EURUSD: Trading the U.S. ISM Manufacturing Report

Interim support rests with the 50% Fibonacci extension taken from the February 9th and 24th crests at 1.3312 backed by 1.3290, the 61.8% extension at 1.3270, and 1.3235. A break above RSI resistance would temporarily alleviate some of the pressure on the single currency with topside resistance seen at the 38.2% extension at 1.3353, 1.3380, the 23.6% extension at the 1.34-figure, and 1.3435. A break above the 2012 highs at 1.3485 negates our bias with such a scenario eyeing subsequent topside targets. Should the print prompt a bearish EURUSD reaction look to play the downside targets with a break below the 1.33-handle putting us more aggressively on the short side.

How To Trade This Event Risk

Expectations for a fourth consecutive rise in the ISM index instills a bullish outlook for the greenback, and the market reaction could set the stage for a long U.S. dollar trade as market participants curb bets for additional monetary support. Therefore, if the ISM index advances to 54.5 or higher, we will need to see a red, five-minute subsequent to the report to generate a sell entry on two-lots of EURUSD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to lock-in our profits.

On the other hand, the slowdown in global trade paired with the drop in private sector consumption could force businesses to scale back on production, and a dismal ISM report could drag on the dollar as it dampens the outlook for future growth. As a result, if the survey falls short of market expectations, we will carry out the same strategy for a long euro-dollar trade as the short position laid out 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)

JAN 2012

02/01/2012 15:00 GMT

54.5

54.1

+39

-7

January 2012 U.S. ISM Manufacturing

EURUSD_Trading_the_U.S._ISM_Manufacturing_Report_body_ScreenShot002.png, EURUSD: Trading the U.S. ISM Manufacturing Report

The U.S. ISM Manufacturing index advance to 54.1 from 53.1 in December, with the gauge for New Orders advancing to 57.6 to mark the highest reading since April. Indeed, the EURUSD climbed above 1.3200 as the release fell short of market expectations, but the dollar regained its footing during the North American trade to end the day at 1.3159.

http://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2011/09/01/How_to_Trade_the_US_Jobs_Report_Sept.html

--- Written by David Song, Currency Analyst and Michael Boutros, Currency Strategist

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To contact Michael email mboutros@dailyfx.comor follow him on Twitter @MBForex.

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

To be added to Michael’s email distribution list, send an email with subject line “Distribution List” to mboutros@dailyfx.com

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01 March 2012 09:00 GMT