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Weak ISM Boosts Fed Easing Expectations

Jul 2 2019, 06:27 PM (+06) | Orbex.com

Fresh US Data Weakness

The US ISM Manufacturing index released yesterday added further weight to the case for the Fed to ease. The data showed the sector recorded its slowest growth since October 2016 over June. It fell to 51.7, from 52.1 over the prior month.

While the reading was poor, it was actually above consensus. The market had been looking for a reading of 51. The projected figure gives a good indication of the negative sentiment prevalent in US manufacturing right now. And, despite being better than expected, the recorded level is still a dismal reading.

New Orders Fall, Employment Rises

Looking at a break down of the sub-indices, there were some notable disappointments. The new orderscomponent which is a key forecast for expected business activity fell to the 50 level from 52.7 prior. This marked its weakest performance since December 2015.

Furthermore, the prices paid index fell from 53.2 to 47.9. This reading was well below the expected 53 level and marks the lowest reading since February 2016. The prices paid index has now dropped into contractionary territory three times in the last six months.

However, there were also some positives among the sub-datasets. Production rose from 51.3 to 54.1, well above an expected drop to the 50 level. Additionally, the employment index also rose from 53.7 to 54.5, again, In contrast to expectations of a fall to 52.8.

US Manufacturing Hit Hard

This latest manufacturing weakness comes on the back of the May reading hitting its lowest level in 10 years. Again, it gives strong support to the case for the Fed easing over the coming months. At its recent meeting, the Fed noted that it would be monitoring data.

Powell stated that many members now feel a rate cut will be likely in the coming months, citing the uncertainty and negative impact of the trade war.

Trump & Xi Pave Way For Fresh Trade Deal Effort

However, in light of the recent meeting between Trump and Xi, could it be that the Fed is able to avoid easing? At the G20 summit held over the weekend in Japan, Trump and Xi agreed to restart the failed trade talks which led to a fresh round of tariffs between the two countries in May.

Additionally, Trump also signaled that he is prepared to reverse the ban on US companies dealing with Huawei. This could prove to be a significant bargaining chip in boosting negotiations. The market now awaits the first round of trade talks following the meeting between the two leaders.

Uncertainty Remains

Despite the fresh agreement, however, there remains a great deal of distance between the two sides in terms of agreeing on a deal. The issues of technology transfer, intellectual property rights, state aid, and dispute resolution all still need to be dealt with before a deal can be done.

In the meantime, the uncertainty is likely to continue to weigh on the US economy, specifically the manufacturing data. This could very well lead the Fed to ease. The market is currently pricing in a .25% cut at the July FOMC.

Technical Perspective

usd index

The recovery in USD index has seen price trading back up to retest the broken 96.41 level, which is holding as resistance for now. If price breaks above here, the next hurdle will be the retest of the broken bullish trend line from 2018 lows. Indeed, there are plenty of topside levels offering resistance which could make a move higher difficult. To the downside, bears will need to see a break of the 95.42 level to see a resumption of the bearish move from 2019 highs.

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