A potential rise in the US Services PMI is on the horizon, but the government shutdown adds an unexpected twist to this economic tale. The Institute for Supply Management (ISM) is set to unveil its October Services PMI report, a highly regarded indicator of business health and a leading economic signal. Markets anticipate a modest expansion in the services sector, with the ISM Services PMI expected to climb to 50.7 in October, up from 50 in September.
However, the ongoing government shutdown has delayed and canceled key macroeconomic data releases, making this ISM report even more crucial for USD valuation in the short term.
But here's where it gets controversial... The ISM Services PMI report could be a game-changer. If the headline PMI exceeds 50 as predicted, and the Employment Index shows a noticeable recovery, investors might rethink their bets on a Fed rate cut in December. This could strengthen the USD and push EUR/USD lower.
On the other hand, a disappointing PMI, coupled with a weak Employment Index or a significant drop in the inflation component, could revive expectations for further policy easing, weighing on the USD and allowing EUR/USD to rebound.
Eren Sengezer, FXStreet's European Session Lead Analyst, provides a technical outlook for EUR/USD: "The near-term technical picture suggests a buildup of bearish momentum. The RSI on the daily chart is heading towards 30, while the 20-day SMA continues its downward slide after a bearish crossover with the 50-day and 100-day SMA."
And this is the part most people miss... The Fed's monetary policy decisions are shaped by two key mandates: price stability and full employment. The Fed's primary tool is interest rates. When inflation exceeds 2%, the Fed raises rates, strengthening the USD. Conversely, when inflation falls below 2% or unemployment is high, the Fed may lower rates, which can weaken the Greenback.
The Fed holds eight policy meetings annually, where the FOMC assesses the economy and makes decisions. The FOMC includes twelve officials: the seven Board of Governors members, the New York Fed president, and four rotating regional Reserve Bank presidents.
In extreme situations, the Fed may employ Quantitative Easing (QE), increasing credit flow in a troubled financial system. QE was used during the 2008 crisis, involving the Fed printing dollars to buy high-grade bonds. This typically weakens the USD. The reverse process, Quantitative Tightening (QT), where the Fed stops buying bonds and doesn't reinvest maturing bond principal, is usually positive for the USD.
So, will the ISM Services PMI report influence the Fed's rate decision in December? Stay tuned to find out!
