Trading Guide: US ISM Non-Manufacturing PMI

Nov. 06, 2012 6:19 AM ET
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Forex Gump is my incognito name. My real name is Feras Gimp. When I was a kid, my parents would make me hunt and gather food. So every day, I would go fish at a nearby lake and gather corn from the fields. This process took me all day and left no time for me to play. Play time actually didn’t matter because I had no friends to play with anyway because they were all to busy hunting and gathering food as well. One day, while resting under an apple tree, an apple fell and hit me on the head. I came up with an idea where if I focused on just fishing and I could find somebody to focus on just gathering corn, maybe we could finish working faster and have enough time left to play. So I tried it and it worked. I wanted to fully understand why this worked and that’s where I discovered his love for economics. I later became a senior macroeconomics professor at Pipvard University in Pipston, Pipsachussetts. After several decades there, one day I decided to stop teaching. Leaving campus that afternoon, as I reversed out of the parking lot, I reversed into a pristine Bentley. It was Dr. Pipslow’s car. (Now a fellow blogger on BabyPips.com) He had been invited by the school to demonstrate his ability to float currencies. When we met each other, Dr. Pipslow already knew who I was. He told me not to worry about his whip and explained to me that BabyPips.com needed a macroeconomics expert and wondered if I was interested. I was. So the following day, I changed me name to Forex Gump and created Piponomics.

Planning to trade the news next week? You might want to take a look at the U.S. ISM non-manufacturing PMI release and how it could affect EUR/USD. I have some tips and tricks for y'all right here!

What is the ISM non-manufacturing PMI all about?

First up, let me tell you what those two acronyms mean. ISM stands for Institute of Supply Management, which is the agency responsible for measuring the Purchasing Managers' Index or PMI for both the manufacturing and non-manufacturing industries in the United States.

The non-manufacturing PMI takes into account the business conditions in the services sector, such as employment, production, new orders, prices, and inventories, to determine whether the industry expanded or contracted during the month. A reading above 50.0 indicates industry expansion while a reading below 50.0 reflects a contraction.

Since the non-manufacturing PMI shows how the services sector fared during a period, it is generally considered a leading indicator of economic growth, along with the manufacturing PMI.

How did the previous releases turn out?

Here's a little piece of trivia that Big Pippin typically uses to impress his dates: Did you know that the U.S. non-manufacturing PMI has been above the 50.0 mark since December 2009? That means the services sector has been expanding for the past three years!

Of course the pace of expansion varies from month to month, as the index has seen its share of worse than expected results. But after dipping from 53.1 to 52.7 in June, the non-manufacturing PMI has been on a tear as it kept climbing over the past few months.

For September, the index landed at 55.1, higher than the estimated 53.7 reading. Note that the actual figure has been beating expectations for the past three months as well.

How could EUR/USD react?

Better than expected actual results usually trigger EUR/USD rallies while weaker than expected results typically result in a EUR/USD selloff right after the report is released. The rally usually lasts anywhere between 50 to 70 pips, as you can see from the charts below.

During the ISM non-manufacturing release on September 6, 2012, EUR/USD rallied from the 1.2580 area until close to the 1.2650 minor psychological resistance. At that time, the actual PMI came in better than consensus as it showed a 53.7 reading instead of 52.6.

The October release showed more or less the same price pattern as EUR/USD rallied from a low of 1.2875 until the 1.2925 mark, before consolidating around 1.2900 for the rest of the U.S. session. At that time, the ISM non-manufacturing PMI also beat the consensus which was at 53.7 and came in at 55.1.

Note, however, that both September and October releases of the U.S. ISM non-manufacturing PMI were preceded by the ADP non-farm employment change report. In both instances, the ADP figure came in stronger than expected and triggered a Greenback rally, setting the stage for EUR/USD to bounce right back up after the strong PMI release.

Tips and tricks for the upcoming release

The October ISM non-manufacturing PMI set to be printed this Tuesday (November 5, 4:00 pm GMT) will not be accompanied by the ADP non-farm employment change report nor any other U.S. economic release.

If you're planning to trade the news, it might be better to wait for the actual figure before taking any positions. More often than not, EUR/USD reacts positively to good data and sells off on weak figures, but be mindful of any other market events that could have a bigger impact on sentiment.

Another thing to take note of is that the initial move only lasts for two to four candles before the pair consolidates for the rest of the U.S. session. With that, don't hold on to your positions for too long and risk erasing your profits!

As I always say though, past performance isn't indicative of future results. While there are some price patterns on EUR/USD during the release of the report, there's always the chance that these results might not be repeated. Better check out our risk disclosure if you plan to trade this report!

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