Main Highlights
- The US ISM Services PMI increased to 52.4 in October, surpassing expectations and indicating sector expansion.
- Inflationary pressures, tracked by the Prices Paid Index, rose slightly to 70.0.
- The Employment Index saw a modest uptick to 48.2, while New Orders surged to 56.2.
- The US Dollar Index (DXY) experienced accelerated gains following the PMI release.
US Services Sector Shows Growth in October
Data from the Institute for Supply Management (ISM) revealed that the Services PMI climbed to 52.4 in October. This marks an increase from the previous month’s reading of 50.0 and exceeded the 50.8 forecast by analysts, signaling a period of expansion in the US services sector.
The Prices Paid Index, a key indicator for inflation, also saw an increase, rising to 70.0 from 69.4. Concurrently, the Employment Index edged higher to 48.2, up from 47.2. The New Orders Index demonstrated significant strength, jumping to 56.2 from 50.4.
Market Reaction and Dollar Strength
Following the release of the US ISM Services PMI on Wednesday, the US Dollar experienced a notable acceleration in its gains. This surge motivated the US Dollar Index (DXY) to reach fresh highs, trading within the 100.30-100.40 band and extending its ongoing recovery trend.
The accompanying heat map illustrates the percentage changes of major currencies against one another. The base currency is selected from the left column, and the quote currency from the top row. For example, the data for USD/JPY indicates the percentage change of the US Dollar against the Japanese Yen.
This section provides a preview of the US ISM Services report for October, originally published at 08:00 GMT.
- The US ISM Services PMI was anticipated to rise to 50.7 in October, suggesting modest expansion in the sector.
- Key components like employment and inflation within the PMI survey were closely watched by investors.
- The technical outlook for EUR/USD indicated a persistent bearish bias in the short term.
The Institute for Supply Management (ISM) was slated to release its October Services Purchasing Managers’ Index (PMI) on Wednesday. This report, recognized as a reliable measure of business performance and a leading indicator of economic activity, was expected to confirm a slight expansion in the services sector.
Given the potential impact of data releases postponed during the US government shutdown, the ISM Services PMI report was anticipated to significantly influence the valuation of the US Dollar (USD) in the near term.
Anticipating the ISM Services PMI Report
Market participants expected the report to indicate moderate growth in the services sector’s business activity, with the headline ISM Services PMI projected to increase to 50.7 in October from 50 in September.
Analysts at TD Securities noted, We look for the ISM surveys to move higher in October, following mostly disappointing outcomes in the summer. ISM services should partially walk back its 2pt September drop. Respondent views and the ISM’s employment components will garner attention.
In September, the Employment Index stood at 47.2, remaining below the 50 mark for the fourth consecutive month, indicating a consistent decrease in service sector payrolls. Following the October policy meeting, Federal Reserve Chairman Jerome Powell acknowledged subdued job creation but stated that the weakness in the job market was not accelerating. Regarding interest rate outlook, Powell mentioned that a December rate cut was far from assured.
Meanwhile, the Prices Paid Index, the inflationary component of the PMI survey, had stayed above 69 for three consecutive months, reflecting robust input costs for the sector.
The CME FedWatch Tool indicated that markets were pricing in approximately a 67% probability of a 25-basis-point Fed rate cut in December.
GDP FAQs
A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022. Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.
A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency. When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.
When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.
ISM Services PMI Release and EUR/USD Impact
The ISM Services PMI report was scheduled for release at 15:00 GMT on Wednesday.
If the headline PMI exceeded 50 and the Employment Index showed a notable recovery towards or above 50, investors might become less inclined to anticipate a Fed rate cut in December. In such a scenario, the USD could sustain its strength, potentially pushing EUR/USD lower.
Conversely, a weaker-than-expected PMI reading, coupled with a poor Employment Index or a significant drop in the inflation component, could reignite expectations for further monetary easing. This might weigh on the USD, allowing EUR/USD to stage a recovery.
Eren Sengezer, FXStreet European Session Lead Analyst, provided a technical outlook for EUR/USD: EUR/USD’s near-term technical outlook points to a buildup in bearish momentum. The Relative Strength Index (RSI) indicator on the daily chart continues to decline toward 30, while the 20-day Simple Moving Average (SMA) extends its slide after completing a bearish cross with the 50-day and the 100-day SMA.
“On the downside, 1.1400 (static level) aligns as an interim support level before 1.1320 (200-day SMA) and 1.1050 (Fibonacci 50% retracement of the January-September uptrend), Sengezer added. Looking north, resistance levels could be spotted at 1.1600 (20-day SMA), 1.1670 (50-day SMA, 100-day SMA) and 1.1800 (static level, round level).”
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Expert Summary
The latest ISM Services PMI data for October shows a positive trend, with the index rising above expectations and indicating growth in the services sector. While inflation remains a concern, modest improvements in employment and a significant boost in new orders suggest underlying economic strength.
The market responded positively to the data, strengthening the US Dollar against major currencies. The report’s implications for future Federal Reserve policy, particularly regarding interest rate decisions, will be closely monitored by investors.