ISM Manufacturing PMI Preview: US factory sector expected to maintain weak momentum in February

• The US ISM Manufacturing PMI  is expected to have risen modestly in February.
• Market players will also pay attention to the ISM Prices Paid Index and the Employment Index. 
• EUR/USD trapped between Fibonacci levels, as PCE inflation did not move the bar. 

The Institute for Supply Management(ISM) will publish the February United States (US) Manufacturing Purchasing Managers’ Index (PMI) on Friday, the first business day of March.  The report is considered a reliable indicator of the US manufacturing sector's health,  and the direction of the overall economy. The figures are expressed in percentages, with anything above 50.0 indicating expansion and readings below reflecting business contraction. 

The US February Manufacturing PMI is foreseen at 49.5, improving from the December reading of 49.1 but still falling short of the desired threshold. According to the official release, “the manufacturing sector contracted in January for the 15th consecutive month following one month of “unchanged” status (a PMI reading of 50) and 28 months of growth prior to that.”

What to expect from the ISM manufacturing PMI report?

Back in January, the ISM Manufacturing PMI was pretty encouraging, as responders to the survey noted an increase in sales and more stable costs. Still, many noted a slowdown in new orders and continuously slow demand. 

The ISM Manufacturing PMI is divided into several subcomponents, some of which are closely watched by speculative interest. In January, the New Orders Index moved into expansion territory at 52.5, somehow suggesting an improving demand outlook. At the same time, the Prices Index registered 52.9, up 7.7 percentage points compared to the  December reading. The Price Index gauges the price change that US manufacturers pay for their inputs, and such an advance signaled heating price pressures. Finally, the Employment Index registered 47.1, down from December’s figure of 47.5.

Generally speaking, a headline reading above 50.0 should indicate above-expectations expansion and financial markets should welcome the positive news. As a result, high-yielding assets such as stocks may run higher, while the US Dollar may come under selling pressure amid risk appetite. Investors will also welcome signs of further expansion, such as an increase in the New Orders sub-component and easing price pressures. 

Regarding inflation, the US released the January Core Personal Consumption Expenditures (PCE) Price Index. The Bureau of Economic Analysis (BEA) reported the Federal Reserve’s (Fed)  favorite inflation gauge on Thursday, with the figures meeting market expectations. The Core PCE Price Index increased 0.4% MoM, doubling the previous 0.2% advance, while the annual rate printed at 2.8% easing from 2.9% in December.  

In line with expectations data barely moved the bar. Market participants continue to bet on a Fed’s rate cut in June, with the odds for a 25 basis points (bps) cut standing at around 52%, unchanged from pre-release levels. 

When will the ISM Manufacturing Purchasing Managers’ Index report be released, and how could it affect EUR/USD?

The ISM Manufacturing PMI report is scheduled for release at 15:00 GMT on Friday. Ahead of the data release, the US Dollar struggles to regain its footing. The EUR/USD pair fell pretty much straight ever since hitting 1.1139 by the end of December, bottoming mid-February at 1.0694. 

Valeria Bednarik, FXStreet Chief Analyst, notes: “Measuring the December/February slump, the 38.2% Fibonacci retracement comes at 1.0865, where sellers rejected advances in the last few days. So far, buyers defended the downside at around the 23.6% retracement of the same slide at 1.0799, with EUR/USD trading mid-way between Fibonacci levels. The pair would need to break any of those extremes to become more attractive to speculative interest.”

Bednarik adds, “The ongoing advance seems a mere correction, and even if the pair manages to extend gains beyond the 1.0860 area, EUR/USD would need to break through 1.0970, the 61.8% retracement, to confirm a sustainable recovery. EUR self–weakness, however, plays against the bullish case. To the downside, the 1.0800 area is indeed providing support, with a break below it opening the door to a retest of the monthly low. In the meantime, the pair will likely extend its consolidative phase ahead of a directional catalyst that could affect the market’s perspective about upcoming Fed moves.”