ISM Manufacturing PMI Preview: USD set to take advantage of the smallest surprise

The US manufacturing sector is relatively small in comparison to the services sector, similar to other developed economies. Nevertheless, it remains important, especially under the current Administration, which aims to boost manufacturing.

ISM's purchasing managers' index, a forward-looking indicator, reached a high level of 59.` points in January, significantly above the 50-point threshold that separates expansion from contraction. At current levels, the indicator reflects robust growth in this sector. 

A small slide to 58.7 is expected, which also sends the same message of upbeat expansion. Apart from the headline figure, the Prices Paid component is worth noting, as the Fed focuses on inflation. According to the previous report, prices were set to rise at a rapid clip, with the component reaching 72.7 points. Also here, a minor slide is projected, to 70.5 points, still at sky-high levels.

The ISM Manufacturing PMI also serves as a hint for the Non-Farm Payrolls, due this time only on Friday, March 9th. The employment component is of particular importance. 

It is important to note that the PMI is published 90 minutes after the Fed's favorite inflation report is released. Any significant surprise in the Core PCE may overshadow the PMI, but surprises are not very common in the PCE report. 

US Dollar enjoying tailwinds

In addition, the second part of Fed Chair Jerome Powell's testimony begins at the same time, 15:00 GMT. Nevertheless, Powell has already sent a clear message which is quite hawkish.

The Fed is currently set to raise rates three times in 2018, according to its forecasts from December. When asked about it, Powell said that things have changed since then, and listed only positive developments. The US Dollar strengthened and is likely to continue enjoying this back wind into the PMI publication.

So, a small beat on the ISM Manufacturing PMI, and especially a figure of 60 and above, can send the greenback significantly higher. A small or even a medium miss may have a limited effect. The US dollar is now enjoying a tailwind, just like the US economy is enjoying tailwinds, according to Powell.

Trading the event with the Market Impact Tool

The event can be followed on the economic calendar and use the Market Impact tool to trade the event. A significant deviation from the previous release may trigger a buying or selling signal. . Here is the Market Impact Studies Users Guide and here is the data to trade the event.

• US ISM Manufacturing PMI
• Primary currency pair: EUR/USD
• Tradable Positive Trigger: +2.5 deviation [SELL]
• Tradable Negative Trigger: -2.5 deviation [BUY]
• Key Resistance Level: 1.2200
• Key Support Level: 1.2160

In the last five releases, the EUR/USD moved, on average, 25 pips in the 15 minutes after the release and 57 pips in the 4 hours after the release.

The previous release had a surprise measured in a 0.21 deviation, but nevertheless the EUR/USD pair reached a true range of 77 pips in the first 15 minutes and 113 pips in the following 4 hours.

If it comes out lower than expected at a deviation of -2.5 or less, the EUR/USD may go up reaching a range of 43 pips in the first 15 minutes and 55 pips in the following 4 hours. If it comes out at higher than expected with a deviation of +1.5 or higher, the pair may go down reaching a range of 16 pips in the first 15 minutes and 39 pips in the following 4 hours.

Support levels for a long commitment are to be found aproximately at 1.2160 and 1.2180 accordingly to the Confluence Indicator. On the upside, we are watching resistance at 1.2200and 1.2270.

From a positioning perspective, supply is noted between 1.2260 and 1.2290. Vestiges of demand can be seen around 1.2120 based on aggregated trading positions from FXStreet's dedicated contributors.

21% of EUR-based pairs in a basket of 20 world currencies are currently moving downwards acordingly to the Bullish Percentage Index. As such, a release which surprises the market with a negative trigger (USD negative) may lead to a stronger up move in price.

EUR/USD looking vulnerable

The EUR/USD is on the back foot after dropping to the lowest level in 6 weeks, below $1.2200. The pair broke below uptrend support in a clear manner. The RSI is pointing lower, below 50 points. 

The levels to watch are $1.2360 (mid-February high), $1.2260 (mid-February low), $1.2205 (late-February low),  $1.2160 (the early January low) and $1.2090 (the 2017 peak).