ISM data significantly impacts currency values internationally, making the ISM manufacturing index an essential factor in forex trading. Understanding this information (and how to be ready for its monthly publication) is crucial since the ISM manufacturing, construction, and services indices may provide unique chances for FX traders.

Talking points:

• ISM definition

• Effects of ISM on currencies

• How to utilize ISM data in forex trading

ISM: WHAT IS IT?

The Institute for Supply Management (ISM) tracks economic activity throughout the service and industrial sectors. Essential details like adjustments to production levels are included in monthly ISM data releases.

ISM, which has members in 300 nations, was founded in 1915 and is the first management institute in the world. The information gathered from its sizable membership of purchasing managers makes ISM a trustworthy indicator of currency prices and worldwide economic activity. Since a nation’s supply chain often affects its economy, forex traders all around the globe closely follow the monthly ISM manufacturing and non-manufacturing PMI economic news releases.

ISM Polls and Surveys

Every month on the first business day, ISM releases three surveys: the manufacturing, construction, and services. 400 manufacturing buying managers were surveyed for the ISM Purchasing Managers Index (PMI). These buying managers come from various industries and work in five distinct fields:

• Inventories

• Employment

• Supplier delivery speed

• Level of production

• Customers’ new orders.

On the second business day of each month, the ISM releases its PMI for construction, and on the third business day, it releases its PMI for services. Forex traders will consult these releases to assess the dangers present in the market at any particular moment.

HOW DOES ISM DATA AFFECT CURRENCY?

Market movers include the PMIs for manufacturing and non-manufacturing. Currency fluctuations may increase dramatically when these ISM data are posted around 10:30 am ET. Like non-farm payrolls (NFP) statistics, forex traders can evaluate if the US economy is growing or declining since these economic releases are based on historical data from the previous month that was collected directly from industry specialists.

This information affects currencies since it indicates the state of the US economy (see image below).

HOW DOES FOREX TRADERS USE ISM DATA?

Forex traders will contrast the ISM data value from the previous month with the analysts’ stated prediction. The US dollar often rises if the newly reported PMI figure is higher than expected and better than the prior reading. This is when technical and fundamental analysis combines to form a trading setup.

Because the numbers were better than predicted, the EUR/USD declined.

Observe how the better-than-expected PMI result in the scenario above caused the US dollar to strengthen versus the Euro. The EUR/USD hourly data shows that the ISM Manufacturing PMI increased from the previous month to 54.9.

Sharp, quick movements may follow when an economic announcement exceeds expectations. In this instance, EUR/USD lost 150 pip quickly. To profit from capital transfers between the world’s two major economies, traders often chose the Euro as the “anti-dollar.”

Large, liquid financial markets in the Eurozone can accommodate the enormous surges of money fleeing the US. A low US ISM Non-Manufacturing figure often causes the dollar to decline and the Euro to appreciate. Another option is that the US dollar may not respond to the figure if it is consistent with projections and remains constant from the previous month.

An ISM PMI score over 50 generally indicates a growing and robust economy. A reading below 50, however, indicates a weak and shrinking economy. Because of this figure’s significance, an economy is said to be in a recession if the PMI falls below 50 for two consecutive months.

The Markit Group also compiles PMIs for nations in the Eurozone, while ISM compiles regional and national PMIs for the United States. As you can see, traders have a reason to focus primarily on the crucial ISM manufacturing index releases.