US September ISM Services PMI Preview: Eyes on inflation and employment details

• ISM's headline Services PMI is expected to retreat to 60 in September.
• Prices Paid Index component is likely to show that input prices continued to increase.
• EUR/USD could extend rebound with a daily close above 1.1650.

The Institue for Supply Management is expected to report an expansion in the US service sector's economic activity for the 16th month in a row in September with the Services PMI posting 60, following August's print of 61.7. Nevertheless, investors are likely to pay more attention to the underlying details of the report.

The Prices Paid Index component, which declined to 75.4 in August from 82.3 in July, is forecast to rise to 79.3. In the previous survey, all 18 sub-sectors of the services industry reported an increase in input prices. In its flash Services PMI report for September, "cost pressures remained historically elevated, as greater supplier prices and increased wage bills following incentives to entice workers pushed costs up," the IHS Markit noted and added that firms continued to pass higher prices to clients. In case the ISM's publication paints a similar picture, the greenback should be able to preserve its strength against its major rivals.

Meanwhile, the Employment Index component is seen staying unchanged at 53.7 to show an ongoing increase in the service sector employment at a modest pace. A stronger-than-expected print could allow investors to start pricing in a sharp rebound in Nonfarm Payrolls data and help the USD outperform its rivals. On the other hand, a reading below 50 is likely to limit the USD's upside.

To summarize, market participants could ignore the headline September ISM Services PMI, unless there is a large divergence from the market consensus, and focus on inflation and employment components. If the report reveals that inflation in the service sector is strengthening alongside an expansion in employment, the US Dollar Index could regain its traction and look to renew the 13-month high it set last week. On the flip side, the USD selloff could pick up steam especially if a contraction in the service sector employment causes investors to reassess Friday's jobs report and the Fed's asset tapering plan.

EUR/USD technical outlook

Following the five-day decline that dragged it to its lowest level in more than a year 1.1563, the EUR/USD pair managed to stage a rebound and broke above 1.1600 on Monday. However, the Relative Strength Index (RSI) indicator on the daily chart stays below 50, suggesting that the current advance is a technical correction.

In case the pair makes a daily close above 1.1650 (Fibonacci 23.6% retracement of the September downtrend) and the RSI climbs beyond 50, it could target 1.1700 (psychological level/Fibonacci 38.2% retracement) and 1.1775 (50-day SMA).

On the downside, the initial support is located at 1.1600 (psychological level) before 1.1563 (September 30 low) and 1.1500 (psychological level).