How Forex Traders Utilize ISM Data

The ISM (Institute for Supply Management) manufacturing index plays a crucial role in forex trading, with ISM data influencing currency prices globally. As a result, the ISM manufacturing, construction, and services indicators can provide unique opportunities for forex traders, making understanding this data (and how to prepare for its monthly release) essential.

What is ISM?

The Institute for Supply Management (ISM) measures the economic activity from both the manufacturing side as well as the service side. Monthly ISM data releases include key information such as changes in production levels.

Established in 1915, ISM is the first management institute in the world with members in 300 countries. The data gleaned from its large membership of purchasing managers means ISM is a reliable guide to global economic activity, and as a consequence, currency prices. A country’s economy is often determined by its supply chain, as a result, the monthly ISM manufacturing and non-manufacturing PMI (Purchasing Managers’ Index) economic news releases are carefully watched by forex traders around the world.

ISM Surveys

ISM publishes three surveys – manufacturing, construction, and services – on the first business day of every month. The ISM Manufacturing PMI is compiled from surveys of 400 manufacturing purchasing managers. These purchasing managers from different sectors represent five different fields:

  • Inventories
  • Employment
  • Speed of supplier deliveries
  • Production level
  • New orders from customers

In addition, ISM construction PMI is released on the second business day of the month, followed by services on the third business day. Forex traders will look to these releases to determine the risks at any given time in the market.

How does impact currencies?

The ISM Manufacturing and Non-Manufacturing PMIs (Purchasing Managers’ Index) are significant market movers. When these reports are released at 10:30am ET, currencies can experience heightened volatility. Since these economic releases are based on the previous month’s historical data gathered directly from industry professionals, forex traders can determine if the US economy is expanding or contracting – much like the non-farm payrolls (NFP) data.

Currencies react to this information as it represents a gauge of the US economic health (see image below). A stronger than expected PMI number tends to bolster the US dollar, while a weaker than expected reading typically leads to a US dollar sell-off.

How forex trader use impact data

Forex traders will compare the previous month’s ISM data figure with the forecasted number that economists have published. If the released PMI number exceeds the previous month’s figure and is higher than the expected number, the US dollar often rallies in response. This is where fundamental and technical analysis converge to create a potential trading opportunity.

In the example provided, the better than expected PMI number triggered a US dollar rally against the Euro. As shown in the chart (EUR/USD – one hour), the ISM Manufacturing PMI came in at 54.9, higher than the previous month.

When an economic release beats expectations, sharp, fast-paced moves can ensue. In this case, EUR/USD dropped 150 pips in just a few hours. Traders frequently choose the Euro as the “anti-dollar” to take advantage of capital flows between two of the world’s largest economies.

The Eurozone has large, liquid capital markets that can absorb the significant waves of capital seeking refuge from the US. Conversely, a weak US ISM Non-Manufacturing number usually leads to a US dollar sell-off and a rise in the Euro. Another scenario is when the released number is in line with forecasts and/or unchanged from the previous month, in which case the US dollar may not react at all.

In general, an ISM PMI number above 50 indicates that the economy is expanding and healthy. However, a number below 50 suggests that the economy is weak and contracting. This figure is so crucial that if the PMI remains below 50 for two consecutive months, an economy is considered to be in recession.

PMIs are also compiled for Eurozone countries by the Markit Group, while US regional and national PMIs are compiled by ISM. As you can see, forex traders have good reason to pay close attention to the important releases from the ISM manufacturing index.

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