US Services sector looks set for gradual improvement in September

US ISM Services PMI is seen improving a tad in September.
The US services sector is expected to remain within the expansionary territory.
Investors continue to favour a soft-landing scenario of the US economy.

The United States is set to release the Institute for Supply Management’s (ISM) Services Purchasing Managers Index (PMI) on Thursday, with the September index expected to tick higher to 51.7 from the previous 51.5.

In August, the economic activity in the United States (US) services sector improved for the second month in a row, showing the sector's resilience and thus reinforcing the view of a healthy US economy.

Moreover, the ISM Business Activity Index eased to 53.3 in August (from 54.5), suggesting some loss of momentum in business operations, while the ISM Services New Orders Index increased by 1.14 percentage points to 53.0, pointing to stronger demand for services. On a less positive note, the ISM Services Prices Paid Index rose marginally to 57.3 (from 57.0), highlighting still unabated price pressures.

What to expect from the ISM Services PMI report?

Inflation in the US has been on a clear downtrend, allowing the Federal Reserve (Fed) to shift its focus to the domestic labour market when it comes to deciding on future interest rate moves. That said, inflation gauged by the Personal Consumption Expenditures (PCE) Price Index last week reinforced that view. While the core PCE Index remained sticky and rose by 2.7% in the year to August (from the prior month of 2.6%), the headline PCE rose by 2.2%, coming in below consensus and lower than the previous 2.5% increase.

Previewing the release, an ISM Services PMI reading in line with expectations is likely to have minimal impact on the US Dollar (USD), as it would confirm the current market view that a soft landing is totally achievable amidst inflationary pressures, which even remaining above the Fed’s 2% target, are gradually moving in the right direction. A sharper-than-expected decline, however, could have a more significant impact, as the services sector has been a key driver of the economy in recent years. A sudden contraction could wake up risk aversion, threatening the idea of a smooth economic transition and waking up the demand for safe-haven assets like the Greenback.

When will the ISM Services Purchasing Managers’ Index report be released, and how could it affect EUR/USD?

The Institute for Supply Management’s (ISM) Services Purchasing Managers Index (PMI) will be published on Thursday at 14:00 GMT.

According to Pablo Piovano, Senior Analyst at FXStreet, “[T]he continuation of the selling process could initially drag EUR/USD to the 55-day Simple Moving Average (SMA), currently at 1.1024, which comes ahead of the September low at 1.1001 (September 11)”.

Bouts of strength, on the other hand, should motivate the spot to challenge its yearly top of 1.1214 (September 25). Once this region is cleared, the pair could embark on a probable move to the 2023 high of 1.1275 (July 18)”, Pablo adds.

Finally, Pablo suggests that “while above the 200-day SMA of 1.0874, the pair’s constructive outlook should remain unchanged.”

Economic Indicator

ISM Services Employment Index

The ISM Non-Manufacturing PMI released by the Institute for Supply Management (ISM) shows business conditions in the US non-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 the US. The ISM Services Employment Index represents business sentiment regarding labor market conditions and is considered a strong Non-Farm Payrolls leading indicator. A result above 50 is positive (or bullish) for the USD.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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.

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