The Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) report is scheduled for release at 15:00 GMT on Monday, drawing significant attention from market analysts and investors. This report serves as a crucial barometer of the health of the United States manufacturing sector. It will provide key insights into the sector's expansion or contraction. A PMI reading above 50.0 indicates that the manufacturing sector is expanding, while a reading below 50.0 signals contraction. Analysts anticipate that the January PMI will remain in contraction territory, with expectations set at 49.5.
The manufacturing sector has shown mixed signals, with some indices pointing towards expansion while others suggest caution. The New Orders Index continued to expand for the second consecutive month, indicating a steady influx of new orders for manufacturers. Meanwhile, the Backlog of Orders Index increased to 45.9 percent in December, a rise of 4.1 percentage points from November's 41.8 percent, suggesting that factories are receiving more orders than they can immediately fulfill.
In contrast, the Employment Index saw a decline, dropping by 2.8 percentage points compared to November. This indicates a slowdown in hiring within the sector, which could have broader implications for employment trends in the manufacturing industry.
The Production Index, however, showed promising signs, rebounding into expansion territory after six months of contraction in December. This shift indicates that factories have ramped up their output, potentially leading to increased economic activity.
The broader economy has been on an impressive expansion path for 56 months, with only a brief dip in April 2020 during the height of the COVID-19 pandemic. Despite this long-term growth, the anticipated contraction in the January PMI could place additional pressures on the economy.
In the currency markets, the US Dollar (USD) could face selling pressure as investors grow more confident and take on more risk. This shift may influence various currency pairs, including GBP/USD and EUR/USD.
“The continuation of the downward trend should put EUR/USD en route to revisit its 2025 low of 1.0176 established on January 13. The breakdown of this level could signal a bearish turn back to the crucial parity zone.” – Pablo Piovano, Senior Analyst at FXStreet
Market dynamics could change if the EUR/USD pair breaks through minor resistance levels or encounters new obstacles.
“On the flip side, the pair faces a minor resistance at the 2025 high of 1.0532 recorded on January 27. Should it break through this barrier, traders might see a spirited climb toward the December 2024 peak of 1.0629 (set on December 6) once the Fibonacci retracement of the September-January decline at 1.0572 is cleared.” – Pablo Piovano, Senior Analyst at FXStreet
With ongoing geopolitical and economic challenges, investors are wary of potential impacts on currency stability and trends.
“The ongoing negative outlook is expected to persist as long as spot trades below its critical 200-day SMA at 1.0765. Further indicators note that the Relative Strength Index (RSI) has eased below 46, indicating some loss of momentum, while the Average Directional Index (ADX) approaching 22 denotes a weakening trend.” – Pablo Piovano, Senior Analyst at FXStreet
US President Donald Trump's trade tariffs on imports from Canada, Mexico, and China have bolstered haven demand for the US Dollar, affecting global currency dynamics such as the GBP/USD pair. These tariffs are expected to have a negative impact on the overall economy by increasing costs for manufacturers reliant on imported materials.
The ISM Manufacturing PMI report not only reflects the current state of the manufacturing sector but also offers valuable insights into the broader economy's direction. Investors and policymakers alike will scrutinize this report to guide future economic strategies and decisions.