US Services PMI Report: A Slight Rise Amid Government Shutdown
The Institute for Supply Management (ISM) is set to release the October Services Purchasing Managers' Index (PMI) on Wednesday, offering a glimpse into the health of the US services sector. This report, a trusted gauge of business performance and a leading indicator of economic activity, is expected to show a mild expansion. However, the ongoing US government shutdown could significantly impact the valuation of the US Dollar (USD) in the near term, as key macroeconomic data releases have been postponed or canceled.
What to Expect from the ISM Services PMI Report?
Markets anticipate a modest expansion in the services sector's business activity, with the headline ISM Services PMI rising to 50.7 in October from 50 in September. TD Securities analysts predict an improvement in the ISM surveys, following mostly disappointing outcomes in the summer. They highlight that the ISM services index should partially recover from its 2-point drop in September, with employment components and respondent views taking center stage.
In September, the Employment Index stood at 47.2, remaining below 50 for the fourth consecutive month, indicating a steady decline in service sector payrolls. Federal Reserve Chairman Jerome Powell acknowledged low job creation but noted no acceleration of job market weakness. Regarding interest rates, Powell stated that another rate cut in December is 'far from assured'.
The inflation component, Prices Paid Index, has remained above 69 for three consecutive months, reflecting strong input inflation for the sector. Markets currently price in a 67% probability of a 25-basis-point Fed rate cut in December, according to the CME FedWatch Tool.
ISM Services PMI Report Release and EUR/USD Impact
The ISM Services PMI report is scheduled for release at 15:00 GMT on Wednesday. If the headline PMI comes in above 50, as expected, and the Employment Index shows a noticeable recovery toward or above 50, investors might shy away from betting on a Fed rate cut in December. This could strengthen the USD, causing EUR/USD to decline.
Conversely, a disappointing PMI print, coupled with a weak Employment Index or a significant decline in the inflation component, could revive expectations for further policy easing, putting downward pressure on the USD and allowing EUR/USD to rebound.
Eren Sengezer, FXStreet European Session Lead Analyst, provides a technical outlook for EUR/USD, noting a buildup of bearish momentum. The Relative Strength Index (RSI) indicator on the daily chart is declining toward 30, while the 20-day Simple Moving Average (SMA) continues its slide after a bearish cross with the 50-day and 100-day SMA.
Fed FAQs
The Federal Reserve (Fed) shapes US monetary policy, aiming for price stability and full employment. It adjusts interest rates as its primary tool, raising rates when inflation exceeds the 2% target, making the USD stronger. Conversely, when inflation falls below 2% or unemployment is high, the Fed may lower rates, impacting the USD.
The Fed conducts eight policy meetings annually, with the Federal Open Market Committee (FOMC) assessing economic conditions and making decisions. The FOMC includes 12 Fed officials, with rotating one-year terms. In extreme situations, the Fed may resort to Quantitative Easing (QE), a non-standard policy measure used during crises or extremely low inflation, such as the Great Financial Crisis in 2008, which weakened the USD.
Quantitative Tightening (QT) is the reverse process, where the Fed stops buying bonds and does not reinvest maturing principal, typically benefiting the USD.
