US Manufacturing PMI expected to show slight slowdown in February
- The US ISM Manufacturing PMI is expected to tick a tad lower in February.
- Investors will also follow the ISM Prices index and the Employment index.
- EUR/USD came under pressure and broke below the 1.0400 level.
Anticipation is mounting as the Institute for Supply Management (ISM) gears up to unveil the February United States (US) Manufacturing Purchasing Managers’ Index (PMI) this Monday. This crucial report serves as a vital indicator of the health of the US manufacturing sector, while also offering a window into the broader economic outlook.
Key points to keep in mind:
- PMI benchmarks: A reading above 50.0 signals an expanding manufacturing sector, whereas a value below 50.0 indicates contraction.
- Analyst predictions: Experts are forecasting a February PMI of 50.8, marginally below January’s 50.9. Following this slight downtick, the index is still expected to remain within the expansion zone.
- Economic resilience under pressure: It’s worth noting that while the manufacturing sector showed signs of expansion, the health of the overall economy has been put to the test amid some loss of momentum in key fundamentals in past weeks, pouring cold water over the economic “exceptionalism” of the US.
This report not only reflects the pulse of the manufacturing area but also hints at the evolving narrative of the wider economy.
What to expect from the ISM manufacturing PMI report?
In January, the manufacturing sector continued its upward momentum for the third straight month, fueled by improvements in the ISM Manufacturing PMI. Several key components contributed to this optimistic picture:
New Orders surge: The New Orders Index continued to climb, signaling that manufacturers are receiving an increasing number of orders.
Production rebound: The Production Index bounced back into expansion territory for the first time since April 2024, indicating that factories have ramped up their output.
Rising costs: The Prices Index continued its upward trend in January—the fourth straight month of rising prices—likely reflecting buyers locking in and deploying their pricing strategies for 2025.
Backlog of orders: The numbers dipped slightly—from 45.9 in December to 44.9 in January, marking a 1 percentage point decrease. This continues a trend, marking the 28th month in a row where order backlogs have fallen, with none of the six largest manufacturing sectors seeing an increase in their order books in January 2025.
Employment gain: After contracting for 14 of the past 16 months, the Employment Index rebounded in January, climbing to 50.3 and signaling a return to expansion.
Generally, a PMI reading above 50 percent indicates that the manufacturing sector is growing, while a reading below 50 percent signals contraction. However, even levels above 42.5 percent over time can point to broader economic expansion.
Overall, the strength in manufacturing could boost high-yield assets like stocks, as investors become more optimistic about growth prospects. Meanwhile, the US Dollar (USD) might experience selling pressure as market confidence grows and investors shift toward riskier assets. Additionally, indicators such as rising new orders and easing price pressures are positive signs that could further propel economic expansion.
When will the ISM Manufacturing PMI report be released and how could it affect EUR/USD?
The ISM Manufacturing PMI report is scheduled for release at 15:00 GMT on Monday. Ahead of the data release, EUR/USD accelerated its bearish tone and slipped back to the 1.0380 zone to print new two-week lows, and is showing some difficulty in returning to the area beyond the 1.0400 barrier on a sustained basis.
Pablo Piovano, Senior Analyst at FXStreet, explained that the continued downward trend is likely to steer EUR/USD back toward its 2025 low of 1.0176, which was set on January 13. He mentioned that if this level breaks down further, it could signal a bearish turn, pushing the pair back to the critical parity zone.
Piovano also noted that on the upside, the pair faces a bit of resistance at the 2025 high of 1.0532 recorded on January 27. If the pair manages to break through this barrier, traders might see it surge toward the December 2024 top of 1.0629, especially once the Fibonacci retracement level of the September-January decline at 1.0572 is cleared.
Piovano added that the negative outlook is likely to persist as long as the spot trades below its key 200-day SMA at 1.0729.
He also pointed out that the Relative Strength Index (RSI) dropped to around 47, indicating a pick-up in the bearish stance, while the Average Directional Index (ADX) below 13 suggests that the current trend is weakening.
Economic Indicator
ISM Manufacturing Employment Index
The Institute for Supply Management (ISM) Manufacturing Index shows business conditions in the US manufacturing sector, taking into account expectations for future production, new orders, inventories, employment and deliveries. It is a significant indicator of the overall economic condition in US. The ISM Manufacturing Employment Index represents business sentiment regarding labor market conditions and is considered a strong Non-Farm Payrolls leading indicator. A high reading is seen as positive for the USD, while a low reading is seen as negative.
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US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.