By David Song, Currency Analyst

Trading the News: U.S. ISM Non-Manufacturing

What’s Expected:

Time of release: 10 / 05 / 2011 14 : 00 GMT, 10 : 00 EST

Primary Pair Impact : EURUSD

Expected: 52.8

Previous: 53.3

DailyFX Forecast: 51.0 to 55.0

Why Is This Event Important:

The U.S. ISM Non-Manufacturing index is expected to fall back to 52.8 in September from 53.3 in the previous month, and the slower pace of growth may bear down on the exchange rate as it dampens the outlook for future growth. The slowing recovery in the world’s largest economy may lead the Fed to expand monetary policy further, and the FOMC may show an increased willingness to conduct another round of quantitative easing in an effort to stem the risk of a double-dip recession.

However, another unexpected rise in the ISM report may encourage the central bank to raise its fundamental assessment, and the committee may preserve a wait-and-see approach over the remainder of the year as policy makers expect economic activity to gather pace over the coming months. Nevertheless, trader sentiment may play a greater role in driving the market reaction, and risk trends should continue to dictate price action for the USD as long as the Fed retains its zero interest rate policy.

Recent Economic Developments

The Upside

Release

Expected

Actual

Non-Defense Capital Goods Orders ex Aircrafts (AUG)

0.4%

1.1%

Consumer Credit (JUL)

$6.000B

$11.965B

U. of Michigan Confidence (SEP P)

57.0

57.8

The Downside

Release

Expected

Actual

Factory Orders (AUG)

0.0%

-0.2%

Personal Income (AUG)

0.1%

-0.1%

Advance Retail Sales (AUG)

0.2%

0.0%

The rebound in household sentiment paired with the ongoing expansion in consumer credit may spur a rise in serviced-based activity, and a positive ISM print could exacerbate the selloff in the EUR/USD as the fundamental outlook for the world’s largest economy improves. However, the slowdown in private sector consumption paired with the downturn in wage growth may impede on service-based activity, and a larger-than-expected decline in the ISM index may weigh on the USD as growth prospects deteriorate. In turn, the rebound from 1.3145 may gather pace over the next 24-hours of trading, and the EUR/USD may work its way back towards the 50.% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500 as the US faces a slowing recovery.

Potential Price Targets For The Release

How To Trade This Event Risk

Forecasts for a drop in the ISM index instills a bearish outlook for the greenback, but a pickup in private sector activity could pave the way for a long U.S. dollar trade as it raises the outlook for future growth. Therefore, if service-based activity expands at a faster pace in September, we will need to see a red, five-minute candle following the release to generate a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to protect our winnings.

In contrast, the slowdown in private sector consumption paired with the ongoing weakness in the labor market may weigh on services, and a dismal report could encourage a bearish outlook for the greenback as the outlook for future growth deteriorates. As a result, if the ISM crosses the wire at 52.8 or lower, we will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in the opposite direction.

Impact that the U.S. ISM Manufacturing report has had on USD during the last month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

AUG 2011

09/06/2011 14:00 GMT

51.0

53.3

-32

-69

August 2011 U.S. ISM Non-Manufacturing

Service-based activity in the U.S. unexpectedly expanded at a faster pace in August as the ISM index advanced to 53.3 from 52.7 in the previous month, and conditions should continue to improve as the Fed expects economic activity to gather pace over the coming months. However, the breakdown of the report showed the business activity index falling back to 55.6 from 56.1 in the previous month, with the employment component slipping to 51.6 from 52.5, while the gauge for new orders advancing to 52.8 from 51.7 during the same period. As the slowing recovery raises the risk of a double-dip recession, the Fed is widely expected to employ additional monetary tools to stimulate the ailing economy, and the FOMC may keep the door open to conduct another round of quantitative easing in order to stem the downside risk for growth and inflation. The initial reaction to the ISM report was short-lived, with the EUR/USD falling back below 1.4000, and the euro-dollar continued to trade heavy throughout the North American session as the exchange rate settled at 1.3996 at the end of the day.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

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DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/trading_news_reports/2011/10/04/EURUSD_Trading_the_U.S._ISM_Non-Manufacturing_Report.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.