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

Trading the News: U.S. ISM Non-Manufacturing

What’s Expected:

Time of release: 03/03/2011 15:00 GMT, 10:00 EST

Primary Pair Impact: EURUSD

Expected: 59.3

Previous: 59.4

DailyFX Forecast: 59.6 to 60.0

Why Is This Event Important:

Service-based activity in the U.S. is expected to expand at a slower pace in February, with market participants forecasting the ISM index to fall back to 59.3 from 59.4 in the previous month, and the slowdown in private sector activity could weigh on the exchange rate as growth prospects deteriorate. However, as the Fed sees retail spending gathering pace, with the labor market “strengthening modestly,” private consumption may accelerate throughout 2011 as the recovery picks up steam. In turn, the central bank may continue to raise its outlook for growth and inflation, and the FOMC may curb speculation for another round of quantitative easing as the downside risks for the real economy dissipate.

Recent Economic Developments

The Upside

The Downside

As wage growth accelerates, with consumer confidence advancing to a three-year high, the expansion in private sector activity is likely to gather pace as the central bank continues to support the real economy. However, as the economic expansion cools, with households scaling back on consumption, the central bank may see scope to expand monetary policy further as it aims to encourage a sustainable recovery. In turn, the FOMC is likely to carry out the $600B in quantitative easing throughout the first-half of the year, and the central bank may keep the benchmark interest rate close to zero for the majority of 2011 as it aims to balance the risks for the region.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for a drop in the ISM Non-Manufacturing index certainly favors a bearish outlook for the greenback, but an enhanced services report could pave the way for a long U.S. dollar trade as growth prospects improve. Therefore, if the index unexpectedly advances to 59.6 to higher in February, we will need to see a red, five-minute candle following the report to establish 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 generate our first objective. The second target will be based on discretion, and we will moved the stop on the second lot to cost once the first trade reaches its mark in an effort to lock-in our profits.

In contrast, the protracted recovery in the labor market paired with the ongoing slack within the private sector may continue to bear down on economic activity, and a dismal ISM report could spark a bearish reaction in the greenback as the outlook for growth and inflation falters. As a result, if the index weakens to 59.3 or lower from the previous month, we will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.

Impact that the ISM Non-Manufacturing report has had on USD during the last month

January 2011 U.S. ISM Non-Manufacturing

Service-based activity in the world’s largest economy expanded at the fastest pace since August 2005, with the ISM index advancing to 59.4 in January from 57.1 in the previous month, and conditions may improve throughout 2011 as the recovery gathers pace. The breakdown of the report showed new orders increased for the fifth month, with the index advancing to 64.9 from 61.4, while the employment component bounced back to 54.5 from 52.6 in December. As private sector activity accelerates, the Federal Reserve is likely to raise its outlook for growth and inflation, and the central bank may curb speculation for another round of quantitative easing as the downside risks for the economy dissipate. The U.S. dollar rallied following the release, with the EUR/USD slipping to a low of 1.3608, but the euro-dollar recouped some of the losses heading into the end of the day as the exchange rate closed at 1.3629.

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