- August S&P Global Preliminary Manufacturing PMI to improve, Services PMI to stabilize.
- Any deviation from expectations in the US PMI data could impact the US Dollar and the Fed policy outlook.
- EUR/USD trades below 1.0900 ahead of the US PMI release, Jackson Hole Symposium.
Business activity in the United States (US) private sector, as measured by the S&P Global Purchasing Managers Index (PMI) through a monthly survey, will see the release of the August preliminary estimates of Manufacturing PMI and Services PMI on Wednesday.
Heading into the US PMI showdown for August, markets widely expect the US Federal Reserve (Fed) to hold rates next month but remain wary about the future policy path amid increased bets that the Fed will stick with higher rates for a longer period.
In its July survey, S&P Global said its preliminary US Manufacturing PMI rose for the first time in three months to 49.0 from a drop to a 46.3 reading seen in June. The Services PMI Index, however, fell to 52.0 in July when compared to June’s 53.2. The PMI readings suggested that the US economy grew at a slower pace at the beginning of the third quarter.
Commenting on the July survey findings, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said that ”there were several other encouraging bright spots in the survey, most notably including a marked improvement in business expectations for output in the year ahead. Firms are therefore anticipating the current soft patch to soon pass, and importantly are hiring more staff as a result.
“There was also good news on the inflation front. The combination of weak demand and improved supply led to a further “buyers’ market” for many goods. Prices charged for goods consequently barely rose for a third straight month, which should help subdue consumer price inflation in the near term,” Williamson added.
What to expect in the next S&P Global PMI report?
For August, the S&P Global Manufacturing PMI Index is likely to improve further to 49.3. The Services PMI, however, is expected to drop to 52.2 in the reported month, compared with July’s 52.3 print. The Composite PMI is seen unchanged at 52.0 in August.
Analysts at BBH Markets noted, “key August PMI readings will be reported. S&P Global reports preliminary PMIs Wednesday. Manufacturing is expected to remain steady at 49.0, services is expected to fall three ticks to 52.0, and the composite is expected to fall half a point to 51.5. If so, this composite would be the lowest since February.”
When will August flash US S&P Global PMIs be released and how could it affect EUR/USD?
The S&P Global PMI report is slated for release at 13:45 GMT on August 23. The US Dollar is on a corrective move lower from two-month highs against its major counterparts, awaiting the US data for a fresh directional impetus. Meanwhile, the EUR/USD pair is reversing recovery gains below the 1.0850 level.
If the US PMI report surprises positively across the indicators, it will help strengthen the narrative of elevated rates for longer, pushing back against expectations of Fed rate cuts in early 2024. Markets are pricing roughly 25% probability of one more rate hike by the Fed in the final quarter of this year. Encouraging US data could add to the signs of economic resilience, providing a fresh leg up in the US Dollar. EUR/USD could come under renewed selling pressure, testing the 1.0800 demand area yet again.
In case the US business activity disappoints, the US Dollar could extend its correction, as the potential slowdown may justify the Fed pause. Federal Reserve policymakers would appreciate cooling economic activity, as it would help soften inflation further. Although fears of ‘hard-landing’ could keep the downside capped in the safe-haven US Dollar.
Meanwhile, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the EUR/USD pair and writes: “The main currency pair has been ranging between flattish 100-Day Moving Average (DMA) and bullish 200 DMA since mid-August. Will the US data help EUR/USD yield a range breakout? Given that the 14-day Relative Strength Index (RSI) holds below the midline, downside risks remain intact for the pair.”
Dhwani also outlines important technical levels to trade the EUR/USD pair: “100 DMA at 1.0928 aligns at the strong resistance, above which the bearish 21 DMA at 1.0950 will be challenged. Further up, Euro bulls will target the horizontal 50 DMA at 1.0982. Alternatively, immediate support awaits at the 1.0800 round figure, where the 200 DMA emerges. Acceptance below the latter could trigger a fresh downtrend toward the June 12 low of 1.0733.”
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.