FX - EUR/USD: Trading the U.S. ISM Manufacturing Report

Trading the News: U.S. ISM Manufacturing

What’s Expected:

Time of release:10/03/2011 14:00 GMT, 10:00 EST

Primary Pair Impact:EURUSD

Expected: 50.3

Previous: 50.6

DailyFX Forecast: 49.0 to 51.0

Why Is This Event Important:

The U.S. ISM Manufacturing index is expected to fall back to 50.3 in September from 50.6 in the previous month, and the slower pace of growth may weigh on the exchange rate as the region faces an increased risk of a double-dip recession. As the data highlights a weakened outlook for future growth, the Federal Reserve may take additional steps to stimulate the ailing economy, and the FOMC may keep the door open to conduct another round of quantitative easing in order to promote a sustainable recovery.

However, a positive ISM report may spur a growing rift within the FOMC as policy makers expect economic activity to gather pace, and the committee may struggle to meet on common ground as ‘Operation Twist’ comes under increased scrutiny. Nevertheless, trader sentiment may play a greater role in driving the initial reaction as risk trends continue to dictate price action in the foreign exchange market, and a slower rate of production may spur a shift in risk-taking behavior as it dampens the outlook for future growth.

Recent Economic Developments

The Upside

The Downside

Increased demands for large-ticket items paired with the expansion in business investments may spur a rise in manufacturing, and a positive ISM report may lead the EUR/USD to give back the rebound from earlier this month as the fundamental outlook for the world’s largest economy improves. However, a slowdown in manufacturing would dampen the prospects for a sustainable recovery, and market participants may diversify away from the greenback as the U.S. faces an increased risk of a double-dip recession. In turn, the rally from 1.3362 may gather pace, and the exchange rate may continue to recoup the losses from earlier this month as Fed Chairman Ben Bernanke keeps the door open to expand monetary policy further.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for a decline in the ISM index instills a bearish outlook for the greenback, but a positive development may set the stage for a long U.S. dollar trade as the data raises the prospects for future growth. Therefore, if manufacturing expands at a faster pace in September, we will need to see a red, five-minute candle following the release to generate a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish out first target. The second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in an effort to protect our profits.

On the other hand, the ongoing weakness within the real economy paired with fears of a double-dip recession may bear down on business sentiment, and manufacturing may deteriorate throughout the remainder of the year as private sector consumption remains weak. As a result, if the ISM index slips to 50.3 or lower, we will carry out the same setup for a long euro-dollar trade as the short position laid out above, just in reverse.

Impact that the U.S. ISM Manufacturing report has had on USD during the last month

August 2011 U.S. ISM Manufacturing

Manufacturing in the world’s largest economy expanded at a slower pace in August, with the ISM Manufacturing index falling back to 50.6 from 50.9 in the previous month, and conditions may deteriorate further as the US faces a slowing recovery. The breakdown of the report showed new orders for the second month, with the employment component falling back to 51.8 from 53.5, while the gauge for inventories advanced to 52.3 from 49.3 in the previous month. As growth prospects deteriorate, the Federal Reserve may carry its easing cycle into the following year, and central bank head Ben Bernanke may show an increased willingness to conduct another round of quantitative easing in order to stimulate the ailing economy. The initial reaction to the ISM report was short-lived, with the EUR/USD falling back below 1.4300, but the greenback struggled to hold its ground throughout the North American trade as the euro-dollar ended the day at 1.4257.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com