ISM Manufacturing PMI expected to improve slightly in August, but remain in contraction

The US ISM Manufacturing PMI is expected to improve to 49 in August, still indicating contraction in the sector.
Investors will pay attention to the ISM Prices index and the Employment index.
EUR/USD keeps grinding north, with caution ahead of first-tier releases.

The Institute for Supply Management (ISM) is scheduled to release the August Manufacturing Purchasing Index this Tuesday. The index is a trusted measure of the health of the United States (US) manufacturing sector, closely followed by market players.

The index, based on a survey of companies around the US, revolves around the 50 threshold. A reading above the level indicates an expanding manufacturing sector, while a reading below it indicates contraction.

The ISM Manufacturing PMI is forecast at 49 in August, slightly better than the 48 posted in July.

What to expect from the ISM manufacturing PMI report?

The July ISM report showed that economic activity in the manufacturing sector contracted for the fifth consecutive month, following a two-month expansion preceded by 26 straight months of contraction.

The same report showed that New Orders contracted for the sixth consecutive month, printing at 47.1. The Price Index, which provides clues on inflationary pressures, registered 64.8, down from the 69.7 posted in June, yet still indicating manufacturers pay higher prices. Additionally, the Employment Index registered 43.4, down from June’s figure of 45, while the Production Index printed at 51.4, higher than the 50.3 posted in June.

Overall, manufacturing activity suffered a significant setback in the aftermath of the Coronavirus pandemic and has remained the lagging sector. Services output, on the contrary, has remained resilient. The August ISM Services PMI will be released on Thursday.

Market participants will pay close attention to the employment-related sub-index ahead of the Nonfarm Payrolls (NFP) report, scheduled for release on Friday. The labor market is likely to be at the top of investors’ priorities this week, given its influence on the Federal Reserve's (Fed) monetary policy decisions.

The headline figure will also be relevant and trigger the initial market reaction. A better-than-anticipated outcome, with a reading above the 50 threshold, should boost demand for the USD, as it would both signal economic progress and diminish the odds of upcoming interest rate cuts. The opposite scenario is also valid, with a discouraging result putting pressure on the Greenback and boosting bets for a September rate cut. Still, the report is unlikely to trigger fireworks across the FX board.

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. Ahead of the data release, the EUR/USD pair trades comfortably above the 1.1700 mark, with a modest bullish bias. Caution keeps major pairs trading within limited intraday ranges, albeit broad USD weakness helps EUR/USD grind north.

Valeria Bednarik, FXStreet Chief Analyst, notes: “The EUR/USD pair seems poised to retest its 2025 high at 1.1830 in the upcoming days. Despite the limited momentum, technical readings clearly indicate that bulls hold the grip. The August peak at 1.1742 comes as immediate resistance, en route to the mentioned yearly high. Support, on the contrary, is located at the EUR/USD comfort zone around 1.1650, followed by the 1.1590 price zone.”

Bednarik warns: “With the week starting with a US holiday and ending with the NFP release, EUR/USD could see some choppy price action and lack directional definitions. Yet, as the Fed’s September announcement looms, nervous betting on whether the central bank may or may not act this time could result in some wild intraday spikes heading nowhere.”

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

Economic Indicator

ISM Manufacturing PMI

The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US manufacturing sector. The indicator is obtained from a survey of manufacturing supply executives based on information they have collected within their respective organizations. Survey responses reflect the change, if any, in the current month compared to the previous month. A reading above 50 indicates that the manufacturing economy is generally expanding, a bullish sign for the US Dollar (USD). A reading below 50 signals that factory activity is generally declining, which is seen as bearish for USD.

Why it matters to traders?

The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers Index (PMI) provides a reliable outlook on the state of the US manufacturing sector. A reading above 50 suggests that the business activity expanded during the survey period and vice versa. PMIs are considered to be leading indicators and could signal a shift in the economic cycle. Stronger-than-expected prints usually have a positive impact on the USD. In addition to the headline PMI, the Employment Index and the Prices Paid Index numbers are watched closely as they shine a light on the labour market and inflation.