ISM Non-Manufacturing PMI Preview: A pick up may trigger a resumption of the USD rally

The ISM Non-Manufacturing PMI is usually just another hint towards the Non-Farm Payrolls. This time, the NFP is already out and the forward-looking survey will have the full limelight as the most important indicator of the week. Services is the largest sector of the economy and any changes make a difference.

Back in April, the figure dropped to 56.8 points, below expectations but still well above the 50-point threshold separating expansion from contraction. That slide was accompanied by a parallel one in the manufacturing sector. For the month of May, we already know that the ISM Manufacturing PMI rose by 1 point and reached 58.7, above expectations.

The forecast for May's ISM Non-Manufacturing PMI stands at an increase to 57.5 points. The expectations seem reasonable given the manufacturing measure mentioned early and other indicators. A better than expected number cannot be ruled out. 

How could the US Dollar react? 

The US Dollar was unable to take advantage of neither the ISM Manufacturing PMI nor the more important Non-Farm Payrolls report. The all-important jobs report showed an increase of 223K and a rise of 0.3% in monthly wages, both above expectations. While Trump's tweet front-ran the report and took the sting out of the immediate reaction, the greenback did not rise after the dust settled. The American currency is down in the wake of the new week.

A rate hike in June was already priced in, so the upbeat data does not alter expectations. Yet there is another thing hurting the greenback. 

The main downer of the Dollar is the tension around global trade. The Trump Administration implemented steel and aluminum tariffs on the EU, Mexico, and Canada, jeopardizing NAFTA negotiations and the trans-Atlantic alliance. Restrictions on Chinese trade are also on the cards. Tariffs mean a lower volume of trade around the US, and this weighs on the US Dollar. 

While no immediate solution is expected around trade, the concerns become priced in as time goes by. In the meantime, the upbeat data is not priced in. 

So, a third consecutive beat in a top-tier figure cannot be ignored. 

A better ISM Non-Manufacturing PMI could resume the broader uptrend of the greenback and turn the recent slide into just another correction, blip, or dead cat bounce in the greater scheme of things. 

And what if the figure misses expectations? The immediate reaction will be a fall, but if the number comes out below expectations (57.5) but above last time (56.8), the US Dollar could hold its ground. A score of around 57 in America's biggest sector is still good news. 

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