Business activity in the US manufacturing sector contracted at an accelerating pace in February, with the ISM Manufacturing PMI dropping to 47.8 from 49.1 in January. This reading missed the market expectation of 49.5 by a wide margin.
Other details of the report showed that the Employment Index declined to 45.9 from 47.1, the New Orders Index retreated to 49.2 from 52.5 and the Prices Paid Index edged lower to 52.5 from 52.9.
Assessing the survey's findings, “the US manufacturing sector continued to contract (and at a faster rate compared to January), with demand slowing, output easing and inputs remaining accommodative," said Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management (ISM) Manufacturing Business Survey Committee, and added:
"Demand moderated, with the New Orders Index back in contraction as seasonal headwinds were too strong to overcome, New Export Orders Index returned to expansion and Backlog of Orders Index improving but still in moderate contraction territory."
Market reaction to ISM Manufacturing PMI
The US Dollar Index, which tracks the US Dollar's valuation against a basket of six major currencies, retreated from session highs with the immediate reaction. At the time of press, the index was virtually unchanged on the day at 104.15.
US Dollar price this week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the strongest against the New Zealand Dollar.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | 0.05% | 0.47% | 0.56% | 0.89% | -0.09% | 1.53% | 0.67% | |
| EUR | -0.04% | 0.40% | 0.54% | 0.85% | -0.10% | 1.50% | 0.63% | |
| GBP | -0.48% | -0.41% | 0.14% | 0.44% | -0.50% | 1.09% | 0.23% | |
| CAD | -0.57% | -0.54% | -0.14% | 0.34% | -0.65% | 0.96% | 0.09% | |
| AUD | -0.91% | -0.86% | -0.44% | -0.31% | -0.95% | 0.66% | -0.21% | |
| JPY | 0.08% | 0.13% | 0.61% | 0.66% | 1.01% | 1.64% | 0.75% | |
| NZD | -1.53% | -1.48% | -1.04% | -0.95% | -0.66% | -1.61% | -0.91% | |
| CHF | -0.67% | -0.62% | -0.23% | -0.09% | 0.23% | -0.74% | 0.87% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
This section below was published as a preview of the ISM Manufacturing PMI data at 09:00 GMT.
- The US ISM Manufacturing PMI is expected to have risen modestly in February.
- Market players will also pay attention to the ISM Prices Paid Index and the Employment Index.
- EUR/USD trapped between Fibonacci levels, as PCE inflation did not move the bar.
The Institute for Supply Management(ISM) will publish the February United States (US) Manufacturing Purchasing Managers’ Index (PMI) on Friday, the first business day of March. The report is considered a reliable indicator of the US manufacturing sector's health, and the direction of the overall economy. The figures are expressed in percentages, with anything above 50.0 indicating expansion and readings below reflecting business contraction.
The US February Manufacturing PMI is foreseen at 49.5, improving from the December reading of 49.1 but still falling short of the desired threshold. According to the official release, “the manufacturing sector contracted in January for the 15th consecutive month following one month of “unchanged” status (a PMI reading of 50) and 28 months of growth prior to that.”
What to expect from the ISM manufacturing PMI report?
Back in January, the ISM Manufacturing PMI was pretty encouraging, as responders to the survey noted an increase in sales and more stable costs. Still, many noted a slowdown in new orders and continuously slow demand.
The ISM Manufacturing PMI is divided into several subcomponents, some of which are closely watched by speculative interest. In January, the New Orders Index moved into expansion territory at 52.5, somehow suggesting an improving demand outlook. At the same time, the Prices Index registered 52.9, up 7.7 percentage points compared to the December reading. The Price Index gauges the price change that US manufacturers pay for their inputs, and such an advance signaled heating price pressures. Finally, the Employment Index registered 47.1, down from December’s figure of 47.5.
Generally speaking, a headline reading above 50.0 should indicate above-expectations expansion and financial markets should welcome the positive news. As a result, high-yielding assets such as stocks may run higher, while the US Dollar may come under selling pressure amid risk appetite. Investors will also welcome signs of further expansion, such as an increase in the New Orders sub-component and easing price pressures.
Regarding inflation, the US released the January Core Personal Consumption Expenditures (PCE) Price Index. The Bureau of Economic Analysis (BEA) reported the Federal Reserve’s (Fed) favorite inflation gauge on Thursday, with the figures meeting market expectations. The Core PCE Price Index increased 0.4% MoM, doubling the previous 0.2% advance, while the annual rate printed at 2.8% easing from 2.9% in December.
In line with expectations data barely moved the bar. Market participants continue to bet on a Fed’s rate cut in June, with the odds for a 25 basis points (bps) cut standing at around 52%, unchanged from pre-release levels.
When will the ISM Manufacturing Purchasing Managers’ Index report be released, and how could it affect EUR/USD?
The ISM Manufacturing PMI report is scheduled for release at 15:00 GMT on Friday. Ahead of the data release, the US Dollar struggles to regain its footing. The EUR/USD pair fell pretty much straight ever since hitting 1.1139 by the end of December, bottoming mid-February at 1.0694.
Valeria Bednarik, FXStreet Chief Analyst, notes: “Measuring the December/February slump, the 38.2% Fibonacci retracement comes at 1.0865, where sellers rejected advances in the last few days. So far, buyers defended the downside at around the 23.6% retracement of the same slide at 1.0799, with EUR/USD trading mid-way between Fibonacci levels. The pair would need to break any of those extremes to become more attractive to speculative interest.”
Bednarik adds, “The ongoing advance seems a mere correction, and even if the pair manages to extend gains beyond the 1.0860 area, EUR/USD would need to break through 1.0970, the 61.8% retracement, to confirm a sustainable recovery. EUR self–weakness, however, plays against the bullish case. To the downside, the 1.0800 area is indeed providing support, with a break below it opening the door to a retest of the monthly low. In the meantime, the pair will likely extend its consolidative phase ahead of a directional catalyst that could affect the market’s perspective about upcoming Fed moves.”
US Dollar FAQs
What is the US Dollar?
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.
How do the decisions of the Federal Reserve impact the US Dollar?
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.
What is Quantitative Easing and how does it influence the US Dollar?
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.
What is Quantitative Tightening and how does it influence the 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.
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