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

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Trading the News: U.S. ISM Manufacturing

Why Is This Event Important:

Manufacturing in the world’s largest economy is expected to expand at a faster pace in December, and the rise in production could spark a bullish reaction in the U.S. dollar as the outlook for future growth improves. However, as the Fed casts doubts for a sustainable recovery, the cautious tone held by the central bank could weigh on business sentiment, and firms may scale back on production and employment as the economic outlook remains clouded with uncertainties.

What’s Expected:

Time of release:1/3/2011 15:00 GMT, 10:00 EST

Primary Pair Impact :EURUSD

Expected: 56.9

Previous: 56.6

Will This Be Market Moving (Scenarios):

The ISM manufacturing index is forecasted to increase to 56.9 in December from 56.6 in the previous month, while the gauge for prices paid is projected to advance to 71.0 from 69.5 in November. As the prospects for growth and inflation improves, the data is likely to instill a brightened outlook for the U.S. economy, and central bank may look to revise its economic assessment over the coming months as the recovery gradually gathers pace.

The Upside

As household spending expands throughout the second-half of 2010, with economic activity increasing at a faster pace in the third-quarter, the recent improvement in the private sector may lead businesses to increase their rate of production as the recovery picks up steam. In turn, a rebound in the ISM index could lead the EUR/USD to extend the decline from the previous month, and the exchange rate may continue to retrace the advance from September as the data reinforces an enhanced outlook for growth and inflation.

The Downside

On the other hand, fading demands for U.S. durable goods paired with the slowdown in global trade may lead businesses to scale back on production and employment, and a dismal manufacturing report could exacerbate the recent weakness underlying the U.S. dollar as investors weigh the prospects for a sustainable recovery. An unexpected drop in the ISM index could certainly weigh on the exchange rate, and lead the EUR/USD to pare the sharp decline from November as investors speculate the Fed to conduct additional monetary easing in 2011.

How To Trade This Event Risk

Trading the given event risk certainly favors a bullish bias for the greenback as market participants expect private sector activity in the U.S. to expand at a faster pace, and price action following the release could pave the way for a long U.S. dollar trade as the outlook for growth and inflation improves. Therefore, if the ISM index advances to 56.9 or higher in December, we will need a red, five-minute candle following the data to establish a sell entry on two-lots of EUR/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing high or a reasonable distance after taking market volatility into account, and this risk will generate our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to preserve our profits.

In contrast, the ongoing weakness within the real economy paired with the uncertainties clouding the fundamental outlook may lead businesses to scale back on production, and a dismal manufacturing report exacerbate the recent weakness in the greenback as the Fed casts doubts for a sustainable recovery. As a result, if the ISM index unexpectedly slips to 56.0 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.

Potential Price Targets For The Release

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

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
Nov 2010	12/01/2010 15:00 GMT	56.5	56.6	-46	+32

November 2010 U.S. ISM Manufacturing

Manufacturing in the world’s largest economy expanded at a slower in November, with the ISM index falling back to 56.6 from 56.9 in the previous month, and businesses may continue to scale back on production over the coming months as the rise in global trade tapers off. The breakdown of the report showed the index for new orders pulled back to 56.6 from 58.9, with the gauge for production slipping to 55.0 to mark the lowest reading since June 2009, while inventories advanced to 56.7 from 53.9 in October. As private sector consumption remains dampened by the ongoing weakness in the labor market, the substantial margin of slack within the real economy may continue to bear down on the recovery, and businesses may keep a lid on production and employment as the fundamental outlook remains clouded with high uncertainty. In turn, the Fed is likely to maintain the expansion in monetary policy throughout the first-half of 2011, and the central bank may additional steps to stimulate the ailing economy as it aims to encourage a sustainable recovery.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the EUR against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.

Bearish Scenario: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the EUR against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.

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View the Expo Presentation on ‘Trading the News’ For Additional Resources

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

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