Dismal ISM Manufacturing Survey to Curb EUR/USD Losses

- U.S. ISM Manufacturing Survey to Narrow to 60.0 from 60.8, the Highest Reading Since May 2004.

- Near-Term Outlook for EUR/USD Clouded with Mixed Signals. April Opening Range in Focus.

Trading the News: U.S. ISM Manufacturing

A downtick in the ISM Manufacturing survey may generate near-term headwinds for the U.S. dollar as it dampens the outlook for growth and inflation.

Keep in mind, Europe remains closed on Monday in observance of the Easter holiday, with the foreign exchange market likely to face choppy conditions as market participation remains thin.

Nevertheless, signs of waning businesses confidence may dampen the appeal of the greenback as it limits the Federal Reserve’s scope to extend its hiking-cycle, and Chairman Jerome Powell and Co. may continue to project a neutral Fed Funds rate of 2.75% to 3.00% as ‘recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings.’

However, another unexpected uptick in the ISM survey may drag on EUR/USD as it boosts bets for four Fed rate-hikes in 2018, and a further improvement in business sentiment may encourage the Federal Open Market Committee (FOMC) to adopt a more hawkish tone at the next interest rate decision on May 2 especially as ‘inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee's 2 percent objective over the medium term.’

Impact that the ISM Manufacturing survey had on EUR/USD during the previous release

February 2018 U.S. ISM Manufacturing

EUR/USD 5-Minute Chart

The ISM Manufacturing survey unexpectedly improved in February, with the index climbing to 60.8 from 59.1 the month prior to mark the highest reading since May 2004. A deeper look at the report showed the Employment component climbing to 59.7 from 54.2 in January, with the Prices Paid index rising to 74.2 from 72.7, while the gauge for New Orders narrowed to 64.2 from 65.4 during the same period. EUR/USD showed a limited reaction despite the better-than-expected print, with the pair snapping back from a session low of 1.2155 to end the day at 1.2267.

EUR/USD Daily Chart

• Near-term outlook for EUR/USD is clouded with mixed signals as the pair fails to test 2018-high (1.2556), while the Relative Strength Index (RSI) continues to track the upward trend carried over from late last year.
• Failure to extend the recent string of lower highs & lows may keep EUR/USD in a tight range, with the monthly opening range in focus as market participation is set to return over the coming days.
• The March range remains on the radar, with a break/close 1.2230 (50% retracement) raising the risk for a move back towards 1.2140 (50% retracement) region, which sits just beneath the March-low (1.2155).

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--- Written by David Song, Currency Analyst

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

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