US ISM Services PMI Preview: Upbeat figures could boost US Dollar

The US Dollar strengthens this week as investors breathe relief following signs of global inflation's continued retreat from mid-2022 record peaks. Central banks are at the end of their tightening cycles, and fears of a steep economic setback decreased.

However,  at least a soft landing is still on the table for most countries. That is what makes growth-related figures critical in terms of currencies’ behavior.

The United States will release the July ISM Services Producer Manager Index (PMI) on Thursday, with the headline reading expected at 53, decreasing from 53.9 in the previous month.  

Recession or soft landing?

Market participants will also be watching key sub-components related to employment and inflation. The ISM Service Employment Index is expected to have contracted to 51.1 from 53.1 in June, while the ISM Services Price Paid is foreseen at 52.1 from 54.1 previously.

It is also worth noting that the services sector has been “saving the day,” not only for the US, as manufacturing output has been in contraction territory for several months. The ISM Manufacturing PMI printed at 46.4 in July, barely improving from 46 in the previous month. The official report indicated that all the ten sub-indexes remained below 50, the level that separates contraction from expansion in the activity level. It also added that eight of those ten improved in July, suggesting “demand could be coming back,” according to Timothy R. Fiore, Chair of the Institute for Supply Management.

Speculative interest has lately chosen to hold on to hopes for a soft landing, and dismissing some intraday caution, optimism reigns. The slightest indication of economic progress will likely underpin the American currency.

Dollar Index technical outlook

The Dollar Index (DXY) is in franc recovery after posting a multi-month low of 99.56 mid-July, now at its highest in over a month in the 102.40 price zone. A more sustainable recovery, however, will have better chances if the DXY runs beyond 104.70, May’s monthly high.

The daily chart for the US Dollar Index shows that it has extended the rise after breaking through the 61.8% Fibonacci retracement of the 103.57/99.56 slump at 102.05, an immediate support level. Furthermore, DXY is crossing above its 100 Simple Moving Average (SMA) while the 20 SMA gains upward traction far below the current level. Finally, the Relative Strength Index (RSI) indicator aims north within positive levels, while the Momentum indicator consolidates in neutral territory.

The technically bullish stance suggests that positive news could have a wider impact on the US Dollar, as those would go with the flow.  On the contrary, a bad number needs to be really awful to push the market in the opposite direction.