US ISM Manufacturing PMI fell to 54.6 in August

In August, the US manufacturing sector lost some momentum. Indeed, the ISM Manufacturing PMI dropped from 55.6 in July to 54.6, below analysts' prediction of 55.2.

The Employment Index fell to 51.2 from 52.8, suggesting the sector's payrolls are struggling. The Prices Paid Index, which monitors inflation, held steady at 71.1. Finally, the New Orders index retreated to 53.7 from 56.7 in the previous reading.

From the release: “Regarding output, the Production Index expanded for the 10th month in a row (though at a slower pace) with the positive-to-negative comment ratio dropping in August (2.2 positive comments for every negative one, versus a 3.3-to-1 ratio in July). The Employment Index remained in expansion but lost 1.6 percentage points. The positive-to-negative comments ratio on Employment also dropped (1.3-to-1, compared to 1.5-to-1 the previous month)”, argued Susan Spence, MBA, Chair of the Institute for Supply Management (ISM) Manufacturing Business Survey Committee.

Market reaction

The US Dollar (USD) trims part of its earlier gains following Monday’s pullback, prompting the US Dollar Index (DXY) to trade with modest gains in the 99.50-99.60 band in the wake of the data releases.

This section below was published as a preview of the US ISM Manufacturing report for September at 12:30 GMT.

• The US ISM Manufacturing PMI is expected to weaken slightly in August.
• Investors will also follow the ISM Prices and the Employment indices. 
• EUR/USD has broken below its 200-day SMA, a herald for probable extra losses.

Attention shifts to Tuesday’s release of the August ISM Manufacturing Purchasing Managers Index (PMI), one of the most closely followed indicators of activity in the US manufacturing sector and an important barometer of the broader economy.

Markets expect the headline index to worsen a tad to 55.2 in August (from 55.6). That would be the eighth consecutive month with the index above the key 50 level that separates expansion from contraction, further suggesting that manufacturing activity continues to expand despite ongoing challenges.

But the story of the manufacturing sector is only part of the overall picture. The broader US economy has continued to prove impressively resilient thanks to solid growth results and healthy job creation despite the latest cooling in hiring. That resilience has kept the narrative of US “exceptionalism” alive, contrasting with many of its G10 peers.

But it will be more than just the headline figure that matters for investors. Signs of improving demand, new orders or employment could raise confidence that manufacturing remains solid and stable, while a disappointing report would add to concerns that the sector is struggling to gain meaningful traction despite the economy's broader upbeat tone.

What to expect from the ISM Manufacturing PMI report?

The manufacturing sector advanced to levels last seen more than four years ago in July, with business activity managing to stay in the expansion territory for the seventh consecutive month and extending the promising start to the year.

A glimpse at the July figures saw the New Orders component climbing to two-month highs at 56.7, suggesting demand remained solid. At the same time, price pressures eased for the third month in a row as the Prices Paid Index fell to 71.1 (from 73), showing that inflationary pressures in the manufacturing sector appear to be slowly cooling. The picture in the labour market has also improved, with the Employment Index rising to 52.8 (from 49.7) in the prior month, the highest reading since August 2022, signalling that hiring conditions are still improving.

A reading above 50 on the ISM Manufacturing PMI is generally considered a sign of expansion in factory activity, with a reading below that point indicating contraction. However, history suggests that sustained levels above 42.5 are still generally consistent with growth in the overall US economy.

A stronger-than-expected PMI would likely boost confidence in the resilience of the US economy for markets and underpin equities and broader risk sentiment.

But the implications for the US Dollar are less straightforward. A stronger report could also stoke expectations that the Federal Reserve (Fed) will hold interest rates at restrictive levels for longer, providing more support for the currency. A stronger report tends to favour the Greenback. On the flip side, a softer-than-expected reading could raise concerns about the manufacturing outlook and dampen sentiment.

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 14:00 GMT on Tuesday.

During the prior week, EUR/USD has weakened markedly, even breaching below its critical 200-day SMA, which has subsequently allowed for a deeper retracement.

Pablo Piovano, Senior Analyst at FXStreet, explains that further losses now appear more likely, with the immediate support at the provisional 100-day SMA near 1.1570. The loss of this short-term contention zone could lead to a test of the minor support at 1.1511 (August 13), ahead of the intermediate 55-day SMA around 1.1490.

On the other hand, “if the pair manages to reclaim the 200-day SMA, it could then embark on a potential revisit to the August ceiling at 1.1711 (August 21)", Piovano adds.

“Momentum indicators also suggest that extra declines should not be ruled out, as the Relative Strength Index (RSI) has retreated sharply and flirts with 51, while the Average Directional Index (ADX) above 40 suggests that the current trend is quite solid”, he concludes.