Amid the chaos of the US government shutdown, a crucial economic report is about to drop, and it could shake up the markets. The Institute for Supply Management (ISM) is set to unveil its October Services Purchasing Managers’ Index (PMI) this Wednesday, offering a rare glimpse into the health of the US economy during these uncertain times. But here's where it gets intriguing: with key macroeconomic data releases on hold due to the shutdown, this report might just become the de facto compass for investors navigating the US Dollar's (USD) near-term trajectory.
The ISM Services PMI is more than just a number—it's a trusted barometer of business performance and a leading indicator of economic activity. Markets are buzzing with anticipation, expecting a modest expansion in the services sector, with the headline PMI inching up to 50.7 in October from September's 50. TD Securities analysts chime in, predicting a rebound after a lackluster summer, particularly highlighting the importance of respondent views and the employment components. And this is the part most people miss: the Employment Index has been stubbornly below 50 for four straight months, signaling a steady decline in service sector payrolls. Federal Reserve Chairman Jerome Powell acknowledged the sluggish job creation but assured that the labor market isn’t worsening—at least not yet. Meanwhile, the inflation component, the Prices Paid Index, has been soaring above 69 for three months, pointing to robust input inflation.
But here's the controversial bit: While markets are pricing in a 67% chance of a 25-basis-point Fed rate cut in December, a stronger-than-expected PMI report, especially with a recovering Employment Index, could shift the narrative. If the PMI exceeds 50 and employment shows signs of life, investors might rethink their bets on a December rate cut, potentially bolstering the USD and pushing EUR/USD lower. Conversely, a disappointing PMI, coupled with weak employment or cooling inflation, could reignite hopes for policy easing, weighing on the USD and allowing EUR/USD to rebound. Is the Fed’s next move as certain as markets think?
Eren Sengezer, FXStreet’s European Session Lead Analyst, paints a bearish picture for EUR/USD in the near term. The Relative Strength Index (RSI) is dipping toward 30, and the 20-day Simple Moving Average (SMA) is extending its downward trend after a bearish crossover with the 50-day and 100-day SMAs. Key support levels to watch include 1.1400, 1.1320, and 1.1050, while resistance looms at 1.1600, 1.1670, and 1.1800.
Let’s zoom out for a moment: The Federal Reserve’s dual mandate—price stability and full employment—drives US monetary policy. When inflation overshoots the 2% target, the Fed hikes rates, strengthening the USD. Conversely, when inflation dips or unemployment rises, rate cuts are on the table, typically weakening the currency. The Fed’s toolkit includes Quantitative Easing (QE), used during crises like 2008 to inject liquidity by buying bonds, and Quantitative Tightening (QT), its opposite, which reduces bond holdings and often supports the USD. But here’s a thought-provoking question: With the economy at a crossroads, is the Fed’s current stance too cautious, or is it playing it safe?
The ISM Services PMI report drops at 15:00 GMT on Wednesday. Will it be a game-changer for EUR/USD, or just another data point in the noise? Share your thoughts below—we’d love to hear your take!
