ISM Services PMI Preview: US services sector expected to accelerate in July

The US ISM Services PMI is expected to improve a tad in July.
The US services sector should remain well in the expansionary territory.
Bets of further Fed tightening appear to have lost traction in the last few days.

On Wednesday, we’ll get the latest read on the US services sector when the Institute for Supply Management (ISM) publishes its July gauge. Consensus points to a marginal improvement to 54.5 from June’s 54. If confirmed, the reading would reinforce the sector’s resilience and offer a modest boost to confidence in the broader economy.

Análisis de TMGM: noticias de mercados financieros, calendario económico e información del mercado

Back in June, the details from that release were encouraging: hiring momentum strengthened, with the ISM Employment Index rising to four-month highs at 51.2. On the flip side, New orders lost a bit of steam, easing to 55.1, which hinted that demand may be cooling. Despite the steady growth, the Prices Paid Index slipped to 67.7, echoing the diminishing momentum of inflation pressures.

What to expect from the ISM Services PMI report?

Inflation in the US is still running hotter than the Federal Reserve’s (Fed) 2% target, and that keeps policymakers uneasy, especially amid the still unresolved crisis in the Middle East and with the full effects of US tariffs yet to filter through the economy.

The latest Personal Consumption Expenditures (PCE) report underscored this point. Core inflation, which strips out food and energy, rose by 3.3% from a year earlier in June, down from 3.4% in May. The Headline PCE increased by 3.7% over the last twelve months from June’s 4.1% annual gain.

Against that backdrop, an ISM Services PMI that lands in line with expectations probably won’t move the US Dollar (USD) much. It would simply confirm the picture of an economy that’s still resilient but still wrestling with sticky price pressures. A softer-than-expected print, though, could shake confidence and see investors probably trimming their USD holdings on fears that growth is losing momentum.

When will the ISM Services Purchasing Managers Index report be released, and how could it affect EUR/USD?

The Institute for Supply Management (ISM) will publish the Services Purchasing Managers Index (PMI) on Wednesday at 14:00 GMT.

Pablo Piovano, Senior Analyst at FXStreet, notes that renewed selling pressure could first prompt EUR/USD to retest its provisional 55-day SMA at 1.1491. A break below this level could lead to a deeper pullback toward the July floor at 1.1386 (July 28).

On the other hand, if the pair regains strength, it could initially revisit the August ceiling at 1.1558 (August 3), just ahead of the intermediate 100-day SMA at 1.1567 and the weekly peak at 1.1622 (June 15), closely followed by the always relevant 200-day SMA at 1.1628, Piovano argues.

Overall, he adds, as long as EUR/USD stays below its 200-day SMA, the broader bearish outlook should remain intact.

GDP FAQs

What is GDP and how is it recorded?

A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022. Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.

How does GDP influence currencies?

A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency. When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.

How does higher GDP impact the price of Gold?

When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.

Economic Indicator

ISM Services Prices Paid

The ISM Non-Manufacturing PMI released by the Institute for Supply Management (ISM) shows business conditions in the US non-manufacturing sector, taking into account expectations for future production, new orders, inventories, employment and deliveries. It is a significant indicator of the overall economic condition in the US. The ISM Prices Paid represents business sentiment regarding future inflation. A high reading is seen as positive for the USD, while a low reading is seen as negative.