The ISM Non-manufacturing index is forecasted to improve to 48.0 from 47.0 in June as thawing credit markets and increasing optimism is expected to have lifted demand. The sector would still be in a contraction phase as a reading below 50 indicates but it would mark the fourth straight month of improvement. If the improvement in the ISM manufacturing gauge which rose a 4.1 points to 48.9 as new orders and employment improved, is any indicator then we could see the sector move into expansion territory.
[B][U]Trading the News: U.S. ISM Non-Manufacturing
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[B][U]What’s Expected[/U][/B]
Time of release: [B]08/07/2009 14:00 GMT, 10:00 EST[/B]
Primary Pair Impact[B] : EURUSD[/B]
Expected: 48.0
Previous: 47.0
[B][U]
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[B][U]Impact the U.S. ISM Non- Manufacturing has had on EURUSD over the last 2 months[/U][/B]
[B]Period[/B]
[B]Data Released[/B]
[B]Estimate[/B]
[B]Actual[/B]
[B]Pips Change[/B]
[B](1 Hour post event )[/B]
[B]Pips Change[/B]
[B](End of Day post event)[/B]
Jun 2009
07/06/2009 14:00 GMT
46.0
[B]47.0[/B]
-5
+55
May 2009
06/03/2009 14:00 GMT
45.0
[B]44.0[/B]
+14
-13
[U]June 2009 U.S. ISM Non-Manufacturing[/U][U][/U]
The Institute of Supply Management showed that the service industry shrank at its slowest pace in nine months led by increases in employment and new orders. The gauge improved to 47.0 from 44.0 and exceeding estimates of 46.0. General business activity also rose to 49.8 from 42.4 the month prior as it appears the economy is reaching a bottom. A slow start to equity markets had provided dollar support which carried through the release. The bullish sentiment would leave us on the sidelines as we were looking for a bearish reaction based on the greenback’s negative correlation to risk appetite. We would eventually see the EUR/USD rally on the improving fundamentals but after we gave up on the trade.
[U]
May 2009 U.S. ISM Non-Manufacturing[/U]
The ISM non-manufacturing index advanced to 44.0 from 43.7 but the mild improvement failed to impact price action as prevailing risk aversion led to dollar support on the day. A small improvement in the employment component to 39.0 from 37.0 was enough to increase optimism for the upcoming US non-farm payroll release of which it often is viewed as a leading indicator. A drop in new orders from 47.0 to 44.4 was a discouraging sign for future growth and added the dimming optimism that was impacting overall sentiment. A bullish dollar reaction kept us the sidelines following the improving data as the broader risk trends continued to dominate price action.
[B]
What To Look For Before The Release[/B]
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
[B][U]Bullish Scenario:[/U][/B][B][U]
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If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.
[B][U]Bearish Scenario:[/U][/B]
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.
[B]How to Trade This Event Risk[/B]
The ISM Non-manufacturing index is forecasted to improve to 48.0 from 47.0 in June as thawing credit markets and increasing optimism is expected to have lifted demand. The sector would still be in a contraction phase as a reading below 50 indicates but it would mark the fourth straight month of improvement. If the improvement in the ISM manufacturing gauge which rose a 4.1 points to 48.9 as new orders and employment improved, is any indicator then we could see the sector move into expansion territory. A similar improvement in the service sector could boost optimism as the sector accounts for 70% of GDP. Additionally, a strong employment component could raise expectations for the US employment report on Friday, that combined with the recent stabilization in the housing sector which saw pending home sales jump 3.6% in June, could lead to an improved outlook for growth and continued dollar weakness. Traders should be cautious that the ADP private employment report is scheduled to cross the wires before hand and could generate volatility on its own.
Considering the dollar’s negative correlation to risk which continues to hold up despite signs the US economy is improving, a positive result would justify a long EUR/USD position Therefore, if the ISM index rises above 50 signaling expansion, we will look for a green, five-minute candle following the release to establish a buy entry on two-lots of EUR/USD. Once these conditions are met, we will place our initial stop at the nearby swing low, or a reasonable distance taking volatility into account, and this risk will determine our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to lock-in our profits.
Conversely, a drop in services would fuel concerns that future consumer consumption will remained subdued and threaten a recovery once government spending abates. As a result, if the reading falls to 45.0 or lower, we will hold a bullish outlook for the greenback, and will follow the same strategy for a short euro-dollar trade as the long position mentioned above, just in reverse.
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