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

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

2012-01-31 20:30:00
David Song, Strategist
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Trading the News: U.S. ISM Manufacturing

What’s Expected:

Time of release: 02/01/2012 15:00 GMT, 10:00 EST

Primary Pair Impact: EURUSD

Expected: 54.5

Previous: 53.9

DailyFX Forecast: 53.8 to 55.5

Why Is This Event Important:

The U.S. ISM Manufacturing index is expected to increase to 54.5 in January and the fasters rate of production may spark a bullish reaction in the U.S. dollar as the development dampens the case for another large-scale asset purchase program. As private sector activity gradually gathers pace, Federal Reserve is likely to endorse a wait-and-see approach throughout 2012, and we expect the central bank to soften its dovish tone for monetary policy as the outlook for growth and inflation improves. However, Fed Chairman Ben Bernanke continues to highlight the ongoing slack within the real economy, the central bank may keep the door open to expand monetary policy further, and Mr. Bernanke may see scope to expand the balance sheet further in an effort to encourage an even stronger recovery.

Recent Economic Developments

The Upside

Release

Expected

Actual

Non-Defense Capital Goods Orders ex Transportation (DEC)

1.0%

2.9%

NFIB Small Business Optimism (DEC)

93.8

93.8

Consumer Credit (NOV)

$7.000B

$20.374B

The Downside

Release

Expected

Actual

Consumer Confidence (JAN)

68.0

61.1

Personal Spending (DEC)

0.1%

0.0%

Personal Consumption (4Q A)

2.4%

2.0%

The rebound in business investments paired with the rise in private sector credit may encourage businesses to ramp up their rate of projection, and the EUR/USD may continue to give back the advance from earlier this month as the fundamental outlook for the world’s largest economy improves. However, as household sentiment wanes, with Americans scaling back on consumption, firms across the region may scale back on production in order to stay afloat. In turn, a dismal ISM report could dampen the appeal of the dollar, and we may see the EUR/USD make another run at 1.3250 as currency traders raise bets for another round of quantitative easing.

Potential Price Targets For The Release

EURUSD_Trading_the_U.S._ISM_Manufacturing_Report_body_ScreenShot070.png, EUR/USD: Trading the U.S. ISM Manufacturing Report

How To Trade This Event Risk

Forecasts for a faster rate of production instills a bullish outlook for the reserve currency, and the market reaction could pave the way for a long U.S. dollar trade as investors scale back speculation for QE3. Therefore, if the ISM advances to 54.5 or higher from the previous month, we will need to see a red, five-minute candle subsequent to the release to establish 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 from the entry, and this risk will generate our first objective. The second target 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 order to preserve our profits.

On the other hand, the drop in consumer confidence paired with the slowdown in household consumption may prompt businesses to scale back on production, and a dismal manufacturing report could encourage the Federal Reserve to ease policy further in 2012 as the central bank aims to stem the downside risks for the region. As a result, should the ISM survey fall short of market expectations, we will implement 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)

DEC 2011

01/03/2011 15:00 GMT

53.5

53.9

+22

+14

December 2011 U.S. ISM Manufacturing

EURUSD_Trading_the_U.S._ISM_Manufacturing_Report_body_ScreenShot069.png, EUR/USD: Trading the U.S. ISM Manufacturing Report

Manufacturing in the world’s largest economy expanded at a faster pace in December, with the ISM index advancing to 53.9 from a revised 52.2, and the development dampens the prospects for another round of quantitative easing as the recovery gradually gathers pace. The breakdown of the report showed the gauge for production advancing to 59.9 from 56.6, with the employment component increasing to 55.1 from 51.8, while inventories contracted for the third consecutive month in December. As businesses boost their rate of production, the more robust recovery will limit the Fed’s scope to push through another large-scale asset purchase program, and we may see the central bank endorse a wait-and-see approach in 2012 as the fundamental outlook for the world’s largest economy improves. The above-forecast ISM print propped up risk-taking behavior, with the EUR/USD extended the advance from the overnight trade, and the exchange rate held steady throughout the North American trade as the pair ended the day at 1.3050.

--- Written by David Song, Currency Analyst

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

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

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View the Expo Presentation on ‘Trading the News’ For Additional Resources

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