ISM Non-Manufacturing PMI Preview: Small slide to test the buck's bounds

• The ISM Non-Manufacturing PMI provides insights about the broad services sector and also serves as a hint towards the NFP.
• The indicator may test the question if the US Dollar has reached overbought conditions.

The purchasing managers' index for the services sector is published by ISM on Thursday, May 3rd, at 14:00 GMT. The services sector consists of the vast majority of the US economy and the vast majority of jobs. The survey provides a forward-looking view of the sector and of the wider economy, as well as serving as a hint towards the Non-Farm Payrolls that awaits markets on Friday. 

The indicator stood at 58.8 points in March, well above the 50-point threshold that separates expansion and contraction. Numbers near 60 already reflect rapid growth. The figure for April is forecast to show a slight moderation to 58.1 points. However, real expectations may be somewhat lower. 

The ISM Manufacturing PMI came out at 57.3 against 58.3 projected and 59.3 points in March. A drop of 2 points in the manufacturing survey likely dampens expectations for the services one. A drop to the 57 handle still represents a very solid economy. 

How will the US Dollar react?

To answer the question, the reaction to the ISM Manufacturing PMI may be telling. A miss on expectations sent the US Dollar lower, but it was short-lived. The downfall lasted for only around 10 minutes before the greenback got back on track and resumed its rises.

Will we see a similar reaction now? Not necessarily. The US Dollar has already made significant gains in the past few weeks with an extended move on Tuesday. Unless the greenback loses significant ground ahead of the publication, a small miss could serve as a trigger for a turnaround, a more significant downward correction. 

What if the largest sector in the US boasts an accelerating expansion? A better-than-expected figure, and especially a score above 60, could extend the US Dollar's gains and push the boundaries of the recent rises. Given overbought conditions against a few currencies, this may be an uphill struggle. 

Further notes

As mentioned earlier, the report also provides a hint towards the Non-Farm Payrolls and this is where the Employment component in this report plays its role. Back in March, Employment increased from 55 to 56.5 points, indicating a faster pace of hiring, albeit below the headline figure. Another increase will be encouraging while a return to previous levels may dent expectations for the NFP.

Another thing to look out for is the separate publication of Factory Orders for March. Orders are projected to accelerate and rise by 1.4% MoM after 1.2% in February. The indicator usually has a limited effect. However, in case the PMI comes out within expectations and Factory Orders surprise in a meaningful manner, the latter number may have the upper hand. 

Conclusion

The ISM Non-Manufacturing PMI is expected to slide from the highs and it is not unreasonable to think that the slide may be somewhat worse than expected. The reaction depends on the US Dollar's positioning and may serve as a trigger for a meaningful correction if the greenback does not correct earlier.

More: Dollar Index: Above 200-day MA, but stuck at the long-term descending trend