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Lackluster ISM Services to Tame USD Strength; All Eyes on Yellen

Lackluster ISM Services to Tame USD Strength; All Eyes on Yellen

2017-03-03 10:00:00
David Song, Currency Strategist
Share:

- U.S. ISM Non-Manufacturing Survey to Hold Steady at 56.5.

- Employment Component Climbed to a Four-Month High of 54.7 in January..

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Trading the News: U.S. ISM Non-Manufacturing

The ISM Non-Manufacturing survey may spark a lackluster market reaction as the index is anticipated to hold steady at 56.5 in February, but a positive development may heighten the bullish sentiment surrounding the U.S. dollar as it fuels bets for a Fed rate-hike.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

The recent batch of hawkish Fed rhetoric have moved interest-rate expectations, with Fed Fund Futures now pricing a greater than 70% probability for a March rate-hike, and the central bank may stay on course to implement higher borrowing-costs over the coming months especially as the U.S. economy approaches ‘full-employment.’ With that said, signs of stronger service-based activity may encourage Fed Chair Janet Yellen to join her colleagues and endorse a more hawkish outlook for monetary policy with the central bank head scheduled to speak ahead of the blackout period. However, a downtick in business sentiment may push Chair Yellen to tame interest rate expectations as ‘market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance,’ and the central bank head may continue to promote a wait-and-see approach as ‘inflation moved up over the past year, mainly because of the diminishing effects of the earlier declines in energy prices and import prices.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Personal Consumption (4Q P)

2.6%

3.0%

NFIB Small Business Optimism (JAN)

105.0

105.9

Advance Retail Sales (JAN)

0.1%

0.4%

The pickup in household consumption may boost business sentiment as it remains one of the leading drivers of growth, and an unexpected uptick in the ISM survey may fuel the near-term decline in EUR/USD as it boosts bets for a March rate-hike.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Construction Spending (MoM) (JAN)

0.6%

-1.0%

Pending Home Sales (MoM) (JAN)

0.6%

-2.8%

Consumer Credit (DEC)

$20.000B

$14.160B

Nevertheless, the slowdown in private-sector lending accompanied by the recent slump in building activity may drag on the U.S. service-sector, and a dismal ISM print may undermine the recent advance in the greenback as it dampens the outlook for growth and inflation.

For More Updates, Join DailyFX Currency Analyst David Song for LIVE Analysis!

How To Trade This Event Risk(Video)

Bullish USD Trade: Gauge for Service-Based Activity Beats Market Expectations

  • Need a red, five-minute candle subsequent to the release to favor a short EUR/USD position.
  • If market reaction favors a bullish dollar trade, short EUR/USD with two separate position.
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to entry on remaining position once initial target is hit; set reasonable limit.

Bearish USD Trade: ISM Non-Manufacturing Survey Disappoints

  • Need a green, five-minute candle to encourage a long EUR/USD position.
  • Implement same strategy as the bullish dollar trade, just in reverse.

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using Trading View

  • EUR/USD may continue to give back the rebound from earlier this year as it preserves the downward trending channel carried over from the previous month, with the Relative Strength Index (RSI) also highlighting a similar dynamic; need a break/close below the Fibonacci overlap around 1.0470 (38.2% expansion) to 1.0500 (50% expansion) to open up the next downside region of interest around 1.0410 (61.8% expansion) to 1.0420 (100% expansion).
  • Interim Resistance: 1.0880 (61.8% expansion) to 1.0910 (38.2% expansion)
  • Interim Support: 1.0340 (2017-low) and 1.0370 (38.2% expansion)

If you’re looking for trading ideas, check out our Trading Guides.

Impact that the ISM Non-Manufacturing survey has had on EUR/USD during the previous print

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JAN

2017

02/03/2017 15:00 GMT

57.0

56.5

+21

+20

January 2017 U.S. ISM Non-Manufacturing

EUR/USD 5-Minute

EUR/USD Chart

The ISM Non-Manufacturing survey narrowed more-than-expected in January, with the headline reading slipping to 56.5 from a revised 56.6 in December. A deeper look at the report showed the gauge for New Export Orders slipped below the 50 mark to post the first contraction since August, with New Orders slowing to 58.6 from 60.7 during the same period, while the Employment component advance to 54.7 from 52.7 in December. The mixed development failed to prop up the greenback, with EUR/USD edging higher throughout the day to close at 1.0785.

Read More:

Euro Unmoved by Upbeat Data as Politics and Trump Grab Traders’ Attention

Silver Price Squaring Off with Notable Resistance

Technical Weekly: USD/JPY - Just a Dip?

Gold Prices March into Fresh 2017 Highs- Fed Outlook in Focus

--- Written by David Song, Currency Analyst

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

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