US ISM Manufacturing on Tap - Will the Dollar Give Back?

The ISM manufacturing index is expected to fall to 49.5 from 49.9 in August, and may weigh on the U.S. dollar as the growth outlook for the world’s largest economy turns bleak.

[B]Trading the News: U.S. ISM Manufacturing[/B]

[B]What’s Expected
[/B]Time of release: [B]10/01/2008 14:00 GMT, 10:00 EST[/B]
Primary Pair Impact : [B]EURUSD[/B]
Expected: [B]49.5[/B]
Previous: 49.9

[B]How To Trade This Event Risk
[/B]
The ISM manufacturing index is expected to fall to 49.5 from 49.9 in August, and may weigh on the U.S. dollar as the growth outlook for the world’s largest economy turns bleak. Indeed, growth prospects have clearly deteriorated over the past month as non-farm payrolls fell 85K in August, while the unemployment rate surged higher to 6.1% from 5.7% in July. Furthermore, retail spending dipped 0.7% during the same period and was followed by a 4.5% decline in durable goods orders, which only suggests that manufacturing activity will weaken throughout the rest of the year as domestic demand falters. Meanwhile, the lack of recovery in the housing sector paired with the ongoing financial crisis has also weighed on growth expectations for the U.S., and conditions may only get worse as lawmakers reject the $700B plan to jumpstart the credit market. Mounting growth concerns have led market participants to raise bets that the Fed will opt to lower the benchmark interest rate as Congress fails to act, which would only fuel bearish sentiment for the greenback going forward.

Despite mounting growth concerns for the U.S. economy, the U.S. dollar has held up fairly well against most of the major currency pairs, and an unexpected improvement in manufacturing could help to raise a bullish outlook for the U.S. dollar. Therefore, if the index crosses above the 50 level, we will look for a red, five-minute candle to confirm entry on two lots of EURUSD, and will setup our initial stop at the nearby swing high (or reasonable distance). This risk will determine our first target, and our second target will be purely based on discretion. To preserve our profit, we will move the stop on the second lot to breakeven once the first half of the trade reaches it target.

On the other hand, if manufacturing activity contracts for the second consecutive month, we expect bearish price action for the greenback to follow the release. We will follow the same strategy for a short as the long mentioned above, just in reverse.