EUR/USD: Will The Weak USD Give ISM Manufacturing An Unexpected Lift?

Friday, 28 September 2007 20:24:11 GMT

Written by Terri Belkas, Currency Analyst

OCT 1

ISM Manufacturing (SEP) (10:00 EST; 14:00 GMT)
ISM Prices Paid (SEP) (10:00 EST; 14:00 GMT)

Expected: 52.5
Expected: 62

Previous: 52.9
Previous: 63

How Will The Markets React?

Conditions in the US manufacturing sector are anticipated to deteriorate for the third month in a row during September, as the Institute for Supply Management index is estimated to fall to 52.5 from 52.9. Over the past few periods, we’ve seen that the weaker US dollar has helped contribute to the ‘new export orders’ component, as American products prove to be cheaper and more attractive, while the broader ‘new orders’ index has staged a strong recovery after falling below the 50 boom/bust level last November. Meanwhile, the highest readings we’ve seen in the ISM manufacturing report have consistently been in the ‘prices paid’ component, which has only underpinned Federal Reserve Bank inflation hawks’ concerns. However, the price index is expected to ease back further in September, supporting broad market speculation of additional rate cuts by the central bank throughout the rest of the year. Furthermore, the ‘employment’ component has struggled to hold above 50 throughout the year, and an index reading below that figure in September (marking a contraction) would bode very ill for this Friday’s NFP report (October 5th), especially as the US financial and housing sectors are likely to have racked up substantial job losses during the month. As a result, now that the Federal Reserve has finally started to note major downside risks to growth and has stopped focusing on inflation, signs that the labor force is diminishing could lead markets to ramp up speculation of a 25 basis point rate cut in October.