Greenback Swings Hinge on ISM Data

The U.S. dollar is riding a wave started by the Federal Open Market Committee (FOMC) statement last Wednesday.

While not a glowing endorsement of U.S. economic strength, the FOMC did not signal a change of course from its current monetary policy, though Federal Reserve members still see a benchmark interest rate hike as being likely later this year. The question of the timing of a rate hike has remains dependant on economic data. This adds some volatility to data releases, and explains some of the enthusiasm for the U.S. unemployment claims release that marked the best week in 15 years, boosting the USD against all major currencies.

Leading U.S. Manufacturing Indicator Due

The release of the Institute for Supply Management’s (ISM) manufacturing purchasing manager’s index (PMI) on Friday will give the American economy another opportunity to impress despite some concerns as it has failed to beat forecasts on a monthly basis since December 2014.

The Fed mentioned in its statement that a strong USD, and transitory effects such as weather and the oil supply glut, have had negative impacts on the economy. The fact that they are considered transitory factors while others such as employment are still considered resilient continues to build expectations of a rate hike later this year if the U.S. economy manages to awaken from its winter slumber.

The market is expecting a similar situation in 2014 where after a disastrous first quarter, blamed mostly on weather, the U.S. roared back to life in the second quarter. It bears reminding that the USD was not as strong then as it is now, and there are other factors that are hard to quantify like the ongoing European quantitative easing program that didn’t exist last year. The weather might be warmer, but the macroeconomic conditions have changed, expecting a similar reaction might delay positive news from the manufacturing sector and the economy at large.

American Consumers Aren’t Spending

Optimistic forecasters argue that the effect of lower energy prices and strong job growth will be enough to offset a strong currency and increase macro headwinds. So far, U.S. consumers have pocketed the energy savings, as retail sales have been softer. The Fed abandoned its focus on the single employment growth headline, to focus on the various components that did now show such a rosy employment picture.

The USD was able to get a boost after the FOMC and better-than-expected unemployment claims this week versus all major pairs except the EUR. The EUR/USD continues to climb and broke the 1.12 level recently. Major pairs like the USD/JPY march onward to the 120 level, and the Canadian loonie had its wings clipped at 1.20 to trade at 1.2120. The release of the ISM’s PMI is forecast to be still in expansionary territory, but if it fails to beat expectations, the underperforming trend of American economic indicators will continue to pressure the USD.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza