Will ISM Manufacturing take the EUR/USD to 1.36?
How Will The Markets React?
Next week, the US economic calendar will be exceptionally busy and US manufacturing ISM is the first of many key pieces of data due for release. Regional indexes have been strong. Both the Empire State and Philadelphia Fed surveys jumped in the month of June. The Empire State survey reached a 1 year high while the Philly Fed survey hit the highest level since March 2006. Even though Chicago PMI fell in the month of June, it still remains above 60, which is well into expansionary territory.
Overall, the regional indexes suggest that the national index will be strong but when it comes to the ISM, there is always more than meets the eye. With US growth and inflation being the market’s top focus, the employment and prices paid components will be closely scrutinized. The employment component is a leading indicator for non-farm payrolls while prices paid will shed some light on how concerned the Federal Reserve should be about inflation. The prices paid component of the regional indices all dropped, so even if the headline number increases, the reaction in the US dollar could be tempered by any downward surprises in the inflation component. Going into the number, the bond and currency markets are not expecting a stronger release. Yields are down sharply while the dollar has sold off. The rebound in the stock market entails a bit optimism, but overall the financial markets are not expecting a strong number. Having already sold off significantly, bonds will probably see a limited reaction to a weak number. The bigger move will be in the EUR/USD and the stock market. In the event that the headline does overshadow prices paid, then we could see a bigger move in yields, stocks and USD/JPY, which has the advantage of carry.