Using ISM Data to Guide Forex Trading Decisions

ISM data is a key indicator of the economic activity and health of various sectors in the US. Forex traders pay close attention to ISM data, as it can affect the demand and supply of currencies worldwide. Therefore, knowing how to interpret ISM data and anticipate its monthly release can help forex traders gain an edge in the market.

Key points:

• What ISM stands for and what it measures?
• How ISM data affects currency movement?
• How forex traders can use ISM data to their advantage?

WHAT ISM STANDS FOR AND WHAT IS MEASURES?

ISM data is a valuable source of information on the economic performance and outlook of various sectors in the US. Forex traders monitor ISM data closely, as it can have a significant influence on the global currency market. ISM data reflects the supply chain conditions of a country, which are crucial for its economic health. ISM releases three surveys every month - manufacturing, construction, and services - that are based on the responses of hundreds of purchasing managers from different industries.

ISM Surveys

The first business day of each month, ISM publishes the Manufacturing PMI, which is derived from the surveys of 400 purchasing managers from the manufacturing sector. These purchasing managers report on five key aspects of their business:

• Inventory levels
• Employment situation
• Supplier delivery times
• Production volume

New orders from customers. The second business day of the month, ISM releases the Construction PMI, followed by the Services PMI on the third business day. These surveys cover the activity and sentiment of the purchasing managers from the construction and services sectors, respectively. Forex traders use these surveys to gauge the risks and opportunities in the market at any given time.

HOW ISM DATA AFFECTS CURRENCY MOVEMENT?

The Manufacturing and Services PMIs are major market drivers. These reports are released at 10:30am ET and can cause significant fluctuations in currency prices. These economic indicators are based on the historical data from the previous month, collected directly from industry experts. Forex traders can use these indicators to assess if the US economy is growing or shrinking - similar to non-farm payrolls (NFP) data.

Currencies respond to this information as it reflects the state of the US economy (see image below).

HOW FOREX TRADERS CAN USE ISM DATA TO THEIR ADVANTAGE?

Forex traders will look at the difference between the actual ISM data figure and the expected number that economists have predicted. If the released PMI number is higher than both the previous number and the forecasted number, the US dollar tends to strengthen. This is where fundamental and technical analysis combine to create a trading opportunity.

EUR/USD falls as a result of better than expected data

In the example above, observe how the better than expected PMI number caused a US dollar surge against the Euro. As shown in the chart (EUR/USD – one hour), the ISM Manufacturing PMI was higher than the previous month at 54.9.

When an economic release exceeds expectation, sharp quick moves can follow. In this case, EUR/USD plunged 150 pips in a few hours. Traders often select the Euro as the “anti-dollar” to benefit from capital flows between two of the largest economies.

The Eurozone boasts robust and highly liquid capital markets, capable of absorbing substantial inflows of capital seeking refuge from the United States. In the event of a weak US ISM Non-Manufacturing number, it often triggers a dollar sell-off, leading to a rise in the Euro's value. Conversely, if the released number aligns with forecasts or remains unchanged from the previous month, the US dollar may remain largely unaffected.

It is crucial to note that an ISM PMI number above 50 signifies a flourishing and healthy economy, while a value below 50 indicates economic weakness and contraction. This indicator holds such significance that if the PMI remains below 50 for two consecutive months, the economy is deemed to be in a state of recession.

The Markit Group compiles PMIs for individual Eurozone countries, while ISM handles the compilation of US regional and national PMIs. These pivotal releases from the ISM manufacturing index warrant special attention from traders due to their potential impact on the global financial landscape.

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