US Services PMI Report: A Slight Increase Amid Government Shutdown
The Institute for Supply Management (ISM) is set to release the October Services Purchasing Managers' Index (PMI) on Wednesday, a crucial indicator of economic health. The report is expected to show a mild expansion in the services sector, which could significantly impact the US Dollar (USD) valuation in the short term due to the ongoing government shutdown.
Market Expectations and Insights
Markets anticipate a modest expansion in services sector activity, with the headline ISM Services PMI rising to 50.7 in October from 50 in September. TD Securities analysts predict a positive trend in the ISM surveys, attributing it to the recovery from disappointing summer outcomes. They highlight the potential reversal of the September drop in the ISM services index and the importance of respondent views and employment components.
Employment and Inflation Trends
In September, the Employment Index stood at 47.2, indicating a decline in service sector payrolls for the fourth consecutive month. Federal Reserve Chairman Jerome Powell acknowledged low job creation but dismissed concerns of accelerating job market weakness. Regarding interest rates, Powell suggested that a December rate cut is uncertain. Meanwhile, the Prices Paid Index, a component of the PMI survey, has remained above 69 for three months, reflecting strong input inflation.
Market Probability of Rate Cut
According to the CME FedWatch Tool, there's a 67% probability of a 25-basis-point rate cut by the Fed in December. This probability could be influenced by the ISM Services PMI report.
Impact on EUR/USD
The report's release is scheduled for 15:00 GMT on Wednesday. If the headline PMI exceeds 50, and the Employment Index shows a recovery, investors might reconsider bets on a December rate cut, potentially strengthening the USD and weakening EUR/USD. Conversely, a disappointing PMI, weak employment, or declining inflation could revive expectations for policy easing, supporting EUR/USD.
Technical Outlook for EUR/USD
Eren Sengezer, FXStreet's European Session Lead Analyst, provides a technical perspective: The EUR/USD pair faces a bearish momentum buildup. The Relative Strength Index (RSI) on the daily chart is declining towards 30, while the 20-day Simple Moving Average (SMA) continues its downward trend after crossing below the 50-day and 100-day SMA.
Support and Resistance Levels
On the downside, key support levels are 1.1400, 1.1320, and 1.1050. Resistance levels are identified at 1.1600, 1.1670, and 1.1800.
Federal Reserve and Monetary Policy
The Federal Reserve (Fed) plays a pivotal role in US monetary policy, aiming for price stability and full employment. It adjusts interest rates to manage inflation and unemployment. When inflation exceeds the 2% target, the Fed raises rates, strengthening the USD. Conversely, low inflation or high unemployment may prompt rate cuts, impacting the USD's value.
Quantitative Easing and Tightening
In extreme situations, the Fed employs Quantitative Easing (QE), a policy to increase credit flow in a stuck financial system. QE involves printing more dollars to buy bonds, typically weakening the USD. Quantitative Tightening (QT) is the reverse process, stopping bond purchases and reinvesting maturing bond principal, often benefiting the USD's value.
