Forex News

• The US ISM Services PMI surpassed consensus in November.
• The US Dollar remains under marked selling pressure on Wednesday.

Fresh data from the Institute for Supply Management (ISM) showed the Services Purchasing Managers Index (PMI) picking up to 52.6 in November from 52.4, beating expectations of 52.1 and signalling a bit more momentum in the sector.

Inflation pressures eased a tad as the Prices Paid Index edged lower to 65.4 from 70. Hiring conditions are still soft, though slightly improved, with the Employment Index rising to 48.9 from 48.2. Meanwhile, new business loses some momentum, with the New Orders Index receding to 52.9 from 56.2.

Market reaction

The Greenback remains well offered on Wednesday, prompting the US Dollar Index (DXY) to drop to fresh lows in the sub-99.00 region and keeping its ongoing march south unabated for now.

This section below was published as a preview of the US ISM Services PMI report for November at 13:00 GMT.

• The US ISM Services PMI is expected to show a slight slowdown in business activity in November.
• Investors will be particularly attentive to the employment and prices paid sub-indexes.
• The US Dollar would need a positive surprise in the ISM Services PMI to ease the current bearish pressure.

The United States (US) Institute of Supply Management (ISM) will release its Services Purchasing Managers’ Index (PMI) data for November on Wednesday at 15:00 GMT.

Traders will be attentive to the Services PMI release to assess the overall conditions of the US services sector, a key contributor to the US Gross Domestic Product (GDP). The ISM is expected to show that the Services PMI eased to 52.1 from October’s 52.4, yet still at levels consistent with healthy growth in the sector’s business activity. If the expectations are confirmed, November will be the second consecutive month of growth in the ISM Services PMI, after stalling at 50.0 in September. PMI figures below that level signal contraction of the sector’s activity.  

Beyond the PMI reading, investors will be attentive to the rate sub-indexes, namely the Employment Index, which has been contracting for the past five months, fuelling concerns about the deterioration of the US labour market. The Prices Paid Index, which reveals inflationary trends in the sector, and the New Orders Index, which shows the prospects for upcoming activity, will also be carefully analysed.

How could US ISM Manufacturing PMI affect EUR/USD?

The EUR/USD has been rallying continuously for the last 8 trading days and is nearly 1.2% up from mid-November lows. Price action has broken the top of the descending channel from early October highs, at 1.1605, and technical indicators are pointing up.

The 4-Hour Moving Average Convergence Divergence (MACD) is rising from the zero line, indicating growing bullish momentum. The Relative Strength Index (RSI), however, has reached overbought levels, which reveals an overstretched market. Bearish attempts, however, are likely to find buyers.

Against this background, the US Dollar would need a positive surprise in the ISM Services PMI, preferably with an unlikely increase in the employment gauge, to regain some of the ground lost over the last few days. 

Otherwise, the EUR/USD is expected to maintain its bullish trend, supported by ECB-Fed monetary policy divergence. Bulls are likely to meet resistance at the 1.1660-1.1670 area, which capped rallies in late October and mid-November. A confirmation above here will bring the October 17 high, near 1.1730, into focus.

Downside attempts, on the contrary, are likely to be challenged at the reverse trendline, now at 1.1605. A bearish reaction beyond that level would give bears confidence to retest Tuesday's low at 1.1590 ahead of the 1.1550 area (near November 26 and 28 lows).

The Euro (EUR) is up 0.3% against the US Dollar (USD) and a mid-performer among the G10, climbing to fresh local highs at levels last seen in late October. The outlook for relative central bank policy is dominating and markets are specifically focused on the prospect of a dovish Fed chair, implying USD weakness rather than EUR strength, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

Bund/BTP spread narrows to 70bpts, a 15 year low

"The euro area’s final services PMI was slightly stronger than expected at 53.6 and the German release also delivered a modest surprise and a rise to 53.1. The French index remains fractionally above 50 (neutral) at 51.4."

"Recent comments from policymakers have leaned neutral/ hawkish with a focus on concerns about upside risks to underlying inflation. Finally, the euro area’s political situation continues to show signs of improvement with a notable softening in the bond market’s fragmentation. The bund/BTP (Italy-Germany) spread has narrowed to 70bpts, its lowest level since 2010."

"The EUR’s latest rally has delivered a push to the upper 1.16s at levels last seen in late October. An extension would target the mid/early-October highs in the mid-1.17s. Momentum is confirming the latest gains in spot and the RSI has climbed above 60, reaching levels last seen in mid-September. We look to a near-term range bound between 1.1620 and 1.1720."

The Canadian Dollar (CAD) gained modestly as a weaker US Dollar (USD), firmer risk sentiment, and stronger commodity prices helped lift the currency toward its estimated fair value. With the USD/CAD bear flag broken and spreads narrowing, spot could drift into the low-1.38s in the coming weeks, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD/CAD breaks bear flag base, pressures toward 1.3880

"The CAD has taken advantage of the softer USD tone to gain a little ground overnight but the advance is one of the smaller gains seen on the big dollar among the majors. As noted above, risk appetite is mainly positive on the session, even if background concerns remain, while crude prices are a little firmer. Rising Copper prices may give Canadian terms of trade a modest, and CAD-supportive, tailwind."

"The CAD’s main support comes from narrowing US/Canada spreads, with the 2Y swap differential holding below 100bps. Our forecasts anticipate a significant narrowing the Fed/BoC policy spread in the coming year which should be reflected in a further, sizeable contraction in market-driven spreads. Spot losses are bringing the CAD closer to our estimated fair value (1.3982 currently)."

"The USD’s break below the base of the noted consolidation pattern (bear flag) yesterday has dumped spot back to Friday’s low around 1.3940. There should be some additional, immediate downside pressure on the USD towards 1.3875/85 as a result of the break below the flag base (now resistance) at 1.3975. After the November rejections at 1.4140, the CAD’s more decisive push through the upper 1.39 zone could point to additional gains to the low 1.38 area in the next few weeks."

US Treasury Secretary Scott Bessent said on Wednesday that he is advocating that regional Federal Reserve (Fed) bank presidents must have lived in their district for three years, per Reuters.

Key takeaways

"Fed chair has room to start discussion on policy but has one vote."

"No one understands Fed's balance sheet function."

"Regional Fed banks don't necessarily represent their districts."

"Taiwan should think that US relationship with it is unchanged."

"The US is a very good ally of China and Taiwan, relationships are unchanged."

"Single biggest point of failure for global economy would be disruption of chips shipments from Taiwan."

"Growth in private credit is due to too-tight regulation of banking system."

Market reaction

These comments don't seem to be having a noticeable impact on the US Dollar's (USD) performance. At the time of press, the USD Index was down 0.35% on the day at 98.97.