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US Dollar Gains as Better-than-Forecast Services PMI Data Backs Case for Hawkish Fed

US Dollar Gains as Better-than-Forecast Services PMI Data Backs Case for Hawkish Fed

Diego Colman, Strategist

ISM SERVICES KEY POINTS:

  • ISM Services PMI at 56.7 in September versus 56.00 expected
  • Resilient services sector activity data backs case for Fed to remain on a hawkish path
  • U.S. dollar extends gains on better-than-forecast results

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A gauge of broad U.S. business services activity remained resilient and moderated less-than-expected at the end of the third quarter, a sign that the economy is holding up well despite growing risks such as high-sky inflation and rising interest rates.

According to the Institute for Supply Management (ISM), September services PMI eased to 56.7 from August's 56.9 print, versus a forecast of 56.00, expanding for the 28th consecutive month. For context, any figure above 50 indicates growth, while readings below that threshold denote a contraction in the sector.

ISM SERVICES PMI

image1.png

Source: Trading Economics

Looking under the hood, the non-manufacturing sector was restrained by a small drop in new orders and production. Both indicators softened on a month-over-month basis, but the retrenchment was not substantial, indicating that demand, while weakening, is not yet falling off the cliff.

On the bright side, the employment index jumped 2.8 points to 53.00, notching its best reading since March, signaling that hiring remains robust despite the Fed’s best efforts to cool the labor market via tighter financial conditions.

On the inflation front, prices paid eased to 68.7 from 71.5, extending the recent pullback that started in mid-summer. While the directional improvement is welcome, cost burdens remained elevated for service providers, a situation that could prevent CPI numbers from downshifting significantly in the coming months.

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ISM SERVICES DATA AT A GLANCE

image2.png

Source: DailyFX Economic Calendar

Immediately following the ISM data, the U.S. dollar, as measured by the DXY index, accelerated its advance, bolstered by rising U.S. Treasury yields. The resilience of activity in the most important sector for the economy, together with the strength of the jobs market, should lead policymakers to maintain an aggressive posture, delivering further interest rate hikes at upcoming FOMC meetings to bring inflation down to the 2% target over the forecast horizon. Against this backdrop, the U.S. dollar is likely to maintain an upward bias in the near term.

US DOLLAR REACTION TO ISM SERVICES DATA

Chart, line chart  Description automatically generated

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---Written by Diego Colman, Market Strategist for DailyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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