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

Manufacturing activity in the U.S. is expected to contract at a slower pace in April as economists project the ISM index to increase to 38.4 from 36.3 in the previous month, and the data could reinforce an improved outlook for growth as demands pick up however, as the region faces its worst economic downturn in over half a century, economic activity is likely to remain subdued throughout the first half of the year.

Trading the News: U.S. ISM Manufacturing

What’s Expected

Time of release: 05/01/2009 14:00 GMT, 10:00 EST
Primary Pair Impact : EURUSD

Expected: 38.4

Previous: 36.3

Impact the U.S. ISM Manufacturing has had on EURUSD over the last 2 months
004--30 TTN1

March 2009 U.S. ISM Manufacturing

Manufacturing in the U.S. fell at a slower pace in March as the ISM index increased to 36.3 from 35.8 in the previous month, and the data suggests the downturn in the economy may be reaching a bottom as policymakers take unprecedented steps to steer the region out of a recession. A deeper look at the report showed new orders increased to 41.2 from 33.1 in February, while export demands rose to 39.0 from 37.5, and the employment component rebounded to 28.1 from a record-low of 26.1 in the previous month. Despite the minor improvement in March, economic activity is likely to remain subdued throughout the year as the labor market deteriorates while credit conditions remain far from normal, and conditions may get worse as the U.S. auto industry falters. Moreover, as the downturn in the world economy intensifies, trade conditions are likely to deteriorate further, which reinforces a weakening outlook for growth.


004--30 TTN2

February 2009 U.S. ISM Manufacturing

The ISM report showed that manufacturing in the U.S. contracted for 13 consecutive months in February, but fell at a slower pace from the previous month as the index increased to 35.8 from 35.6 in January. The breakdown of the report showed new orders ticked lower to 33.1 from 33.2, while the employment component slipped to 26.1 from 29.9, which is the lowest since recordkeeping began in1948, and the data continues to foreshadow a deepening recession in the world’s largest economy as the labor market deteriorates at a record pace. As households continue to face falling home prices paired with fading demands for employment, the outlook for private-spending remains weak, and conditions are likely to get worse as firms continue to cut back on production and investment in response to the downturn in global trade.


004--30 TTN3


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 Euro 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 Euro 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.

004--30 TTN4


004--30 TTN5

How To Trade This Event Risk



Manufacturing activity in the U.S. is expected to contract at a slower pace in April as economists project the ISM index to increase to 38.4 from 36.3 in the previous month, and the data could reinforce an improved outlook for growth as demands pick up however, as the region faces its worst economic downturn in over half a century, economic activity is likely to remain subdued throughout the first half of the year. The advanced GDP reading for the first quarter showed that the world’s largest economy contracted 6.1% from the previous quarter amid expectations for a 4.7% drop in the growth rate as businesses scaled back on spending and production at a record pace, and firms may continue to aggressively cut costs over the year as trade conditions falter. The breakdown of the report showed exports dropped 30.0% in the first quarter to mark the biggest decline in 40-years while imports plunged 34.1% however, the 2.2% increase in personal consumption encouraged an improved outlook for future growth as private-sector spending accounts for more than two-thirds of the economy. At the same time, a report by the Commerce Department earlier this month showed retail sales unexpectedly slipped 1.1% in March, while orders for durable goods fell 0.8% during the same period, and personal consumption may fall in the second quarter as households face a weakening labor market. Non-farm payrolls plunged another 663K in March, which pushed the annual rate of unemployment to a 25-year high of 8.5% from 8.1% in February, while continuing claims for jobless benefits reached a fresh record-high in the week ending April 11, and the outlook for growth and inflation remains bleak as the International Monetary Fund forecasts the annual growth rate to contract 2.8% this year. Meanwhile, after holding the benchmark interest rate at the record low and maintaining its program to drive up the money supply, the Federal Reserve said that ‘the economic outlook has improved modestly since the March meeting,’ and went onto say that the extraordinary efforts taken on by policymakers ‘will contribute to a gradual resumption of sustainable economic growth in a context of price stability.’ The encouraging comments from the central bank sparked expectations for a recovery later this year as the Fed pledged to utilize ‘all available tools to promote economic recovery and to preserve price stability’ however, as policymakers expect economic activity to ‘remain weak for a time’ and sees ‘some risks that inflation could persist for a time below’ the 2% target, the FOMC may continue to step up its efforts to shore up the economy as the region faces a deepening recession. Nevertheless, as risk trends continues to drive price action in the foreign exchange market, a rise in market sentiment could weigh on the reserve currency as investors move into higher risk/reward investments.



Expectations for a rise in the ISM favors a bullish outlook for the greenback as the Fed expects the economy to recover in the second half of the year, and price action following the release could pave the way for a long dollar trade as investors hold long-term expectations for higher interest rates in the U.S. Therefore, an in-line print or a rise above 38.4 would lead us to look for a red, five-minute candle following the event to confirm a sell entry on two-lots of EUR/USD, and once these conditions are met, we will set our initial stop at the nearby swing high (or reasonable distance), and this risk will determine our first target. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade trades its target in order to preserve our profits.



On the other hand, fears of a deepening recession paired with the record-drop in exports may lead firms to lower production in April, and a dismal ISM report could weigh on the greenback as the outlook for growth and inflation remains bleak. As a result, if the index unexpectedly falls to 34.0 or lower, we will follow the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.
004--30 TTN6