Forex trading is a major part of the financial market. FX trading is highly volatile, with the value of currency pairs changing often during the day. But forex trading is not mere guesswork or wild speculation. The values change depending on several factors.
Foreign exchange traders rely on various data to take a position. They pay special attention to ISM manufacturing report data.
What are ISM Reports?
ISM is an acronym for Institute for Supply Management. The institute conducts regular ongoing surveys and releases the data every month.
ISM publishes three surveys on the first three working days, every month. These surveys pertain to manufacturing, services, and construction activities. The survey results, known as the ISM index, track and quantify the economic activity from the manufacturing, construction, and services sectors.
The ISM manufacturing report offers information such as changes in production levels, contraction in demand, disruption to the supply chain, payroll data, and more. It is a composite index that tracks changes associated with production and manufacturing in the U.S. economy. The report, known as The United States ISM Purchasing Managers Index, is published on a monthly basis.
It covers surveys conducted on 400 purchasing managers in the manufacturing sector. This survey is released on the first business day of the month. The survey captures information on production levels, inventories, employment, speed of supplier deliveries, and new orders from customers. ISM makes seasonal adjustments to the weightage of key factors, to improve reliability. It offers components reports, payrolls reports, and other crucial information that corroborate the wider findings.
These insights offer a comprehensive view of the state of the manufacturing sector.
How do ISM Reports Influence Forex Movements?
The ISM construction PMI releases on the second business day of the month. The ISM services PMI is released on the third day of business in the month. These surveys offer in-depth and comprehensive information on the economic activities, over the previous month.
The ISM manufacturing report and ISM non-manufacturing report is among the most reliable indicators of the US economy, after the non-farm payrolls data.
The economy is often the function of the supply chain. The ISM has an established and credible mechanism to capture the state of the supply chain activities. As such, forex traders keep a close eye on the monthly surveys, and also the economic news releases released by ISM.
The movement of the currency largely depends on the state of the economy. Traders rely on orders reports, durable goods reports, EIA reports, and other economic reports for daily market insights. The ISM reports substantiate such reports. While the former reports are often piecemeal and may focus on specific sectors, the ISM reports capture the overall state of the economy, and hence becomes ideal to understand which way the currency will move.
How Traders use ISM Reports
Forex traders rely on the ISM manufacturing report and ISM non-manufacturing report to gauge risks and take up positions. All reports are released at 10:00 am ET. The market is always highly volatile at that time.
Traders in the forex markets compare the ISM data of the latest and previous month with forecasts made by economists. When the latest PMI number is better than the previous PMI number and higher than the forecasts made by economists, it indicates an upward trend in economic activity. In such a scenario, the US dollar moves upward against the Euro, and also other currencies.
Conversely, if the ISM non-manufacturing index releases a weak number, it indicates a contracting economy. Traders react by selling the dollar, and buying Euros. If the released numbers match the economic forecast, it indicates a neutral position. In such eventualities, the US dollar does not react to the index.
An ISM PMI number greater than 50 means an expanding and healthy economy. An ISM PMI number less than 50 means a weak and contracting economy. When the PMI number is below 50 for two consecutive months, it indicates recession.
Consider the United States ISM Purchasing Managers Index for May 2021 and June 2021, to illustrate how to derive insights from the PMI data. The United States ISM Purchasing Managers Index was 61.2 in May 2021 and 60.6 in June 2021. The market forecast for July 2021 was 61. Thus, the data indicates a possible slowdown, though the robust growth continues. The sub-figures for the month corroborate the overall score. The supplier deliveries score reduced from 78.8 in May 2021 to 75.5 in June 2021.
The Employment score contracted from 59.9 in May 2021 to 49.9 in June 2021. But at the same time, the production score increased from 58.8 in May 2021 to 60.8 in June 2021. Export orders scores increased from 55.4 in May 2021 to 56.2 in June 2021. These scores indicate companies struggling to meet demand. Increasing lead time for raw material sourcing and shortages of basic materials critical for manufacturing, coupled with rising commodities prices, and difficulties in transportation, all affect the manufacturing economy. The ISM non-manufacturing index also reported lower scores in June 2021, relative to May 2021.
The key reasons include increasing worker absenteeism, shutdowns owing to shortage of parts, and skill shortages making it difficult to fill open positions. The payrolls report, for instance, sheds light on these aspects.
Traders and other stakeholders involved in the forex market rely on ISM data because of its credibility. Even business analysts, professionals involved in supply chain management, government officials, and business leaders track this index. ISM, established in 1915, is the world’s first management institute. It has members in 300 countries, from whom it sources data. The data comes directly from industry professionals of repute, with very little chance of fudging or errors. The large base makes it a very reliable indicator for global trends and shifts in economic activity.
The EUR/USD is the most popular pair in forex trade, owing to the large capital flows between these two largest economies. ISM focuses on the US economy, and the data from ISM is a good barometer of the US economic health. The Markit group publishes similar PMI reports for the countries in the Eurozone.
Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.
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