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The United States (US) is set to release the Institute for Supply Management ISM Services PMI (Purchasing Managers Index) on Tuesday, offering insights into the health of the crucial services sector. Analysts predict a slight decrease from January’s reading, with the February index expected to land at 53.0, compared to the previous 53.4.
January US ISM Services PMI Report Highlighted Continued Growth
The January report indicated sustained economic expansion, marking the thirteenth consecutive month of growth for the services sector. This underscores the sector’s resilience and its vital role in the US economy. The Business Activity Index remained stable at 55.8, suggesting steady business operations. Furthermore, the New Orders Index experienced a significant increase of 2.2 percentage points compared to December, reflecting a rise in demand for services.
Inflation and the Federal Reserve’s Stance
Inflation has been a major concern in the US, but the recent release of the January Personal Consumption Expenditures (PCE) Price Index offered some relief. The Core PCE index rose 0.4% for the month and 2.8% year-over-year, aligning with market expectations and marking the slowest annual increase since March 2021.
These figures hold significant weight as they represent the Federal Reserve’s (Fed) preferred gauge of inflation. While other economic indicators might suggest temporary spikes in price pressures, the central bank primarily bases its decisions on this specific index. As long as PCE inflation remains subdued, policymakers are likely to hold off on further monetary tightening.
Read more: January PCE Report: Core Inflation Expected to Heat Up
Market Expectations and the US Dollar
Financial markets initially anticipated a swift reversal of the Fed’s monetary policy stance due to receding inflation. However, the Fed appears comfortable with its wait-and-see approach, and a rate cut is not expected until June. The Price Index sub-component within the ISM Services PMI would need to reach exceptionally high levels to raise immediate concerns, and such a scenario would likely require additional confirmation from other macroeconomic indicators over the following months.
A US ISM Services PMI reading in line with market expectations is likely to have a limited impact on the US Dollar, as it would confirm the ongoing economic expansion and the gradual decrease in price pressures, albeit still exceeding the Fed’s target of 2%.
Potential Market Reactions
An unexpectedly sharp decline in the PMI could trigger a more significant response compared to a reading that meets expectations. The services sector has exhibited remarkable strength over the past few years, and a further improvement would likely be less surprising than a sudden contraction. The latter scenario could lead to risk aversion, potentially weighing on high-yielding assets and prompting modest demand for the US Dollar.
Dollar Index Technical Outlook
In the lead-up to the announcement, the Dollar Index (DXY) is trading within a range, hovering below the 104.00 mark. The index has fluctuated between 103.43 and 104.29 over the past week, with the recent modest uptick failing to signal a clear bullish trend. Surpassing the aforementioned 104.29 level would be crucial for the index to gain upward momentum.
From a technical standpoint, the daily chart reveals technical indicators hovering within neutral territory, suggesting a lack of significant buying or selling pressure. Additionally, the DXY is currently confined between directionless moving averages, further reinforcing the notion of indecisiveness in the market.
A break below the 103.40 region could increase the risk of a bearish extension, potentially leading to a test of the 102.90 area. If the index falls below the latter level, the US Dollar could face further depreciation, potentially approaching the 102.00 mark.
Conclusion
The upcoming US ISM Services PMI is expected to show a slight decrease from January’s reading, but it is still anticipated to remain above the 50 mark, indicating continued expansion in the services sector. While inflation concerns persist, the recent PCE data suggests a gradual moderation in price pressures, potentially allowing the Fed to maintain its current wait-and-see approach. The market reaction to the PMI release will likely depend on the extent to which the data aligns with expectations, with a significant deviation potentially triggering a shift in investor sentiment and impacting the US Dollar.
