The Institute for Supply Management (ISM) gauges economic activity including both manufacturing and service areas. The ISM data is released on a monthly basis and involves vital information on changes in production levels.
What is ISM?
On the first working day of each month, ISM releases manufacturing, construction, and services surveys. The ISM Purchasing Managers Index (PMI) collects survey data of 400 manufacturing purchasing managers from various sectors that represent 5 different areas – inventories, employment, production level, new customer orders and speed of provider deliveries.
Furthermore, ISM construction PMI is published on the second working day of each month, while the services data is released on the third business day. Forex traders closely examine these publications to identify market risks.
How does ISM Impact Currencies?
The Manufacturing and Non-manufacturing PMIs have the ability to significantly move the market. Because of this, market volatility substantially increases upon the release at 10:30 am ET.
Given that these surveys are predicated on historical data from a previous month, collected by industry experts, Forex traders can find out whether the economy is developing or weakening. The information affects the currencies as it measures the economic health.
How Forex Traders Use ISM Data?
When it comes to using the ISM data in trading, first of all, Forex traders compare the historical data from a previous month with the estimated figure published by economists. When the published PMI figure is higher than the previous and the estimated figure, the USD is likely to appreciate. As a result, trade setup is developed using both fundamental and technical analysis.
Take a look at the image above. You can see how a higher-than-expected PMI number resulted in a USD rally versus Euro. As you can see, the ISM manufacturing PMI was higher than it was a month ago.
In cases when economic data is higher than the estimated number, you can expect sharp price movements. Using the same example, you can see that EUR/USD fell 150 pips in a few hours. Euro is a popular anti-dollar pick among traders to benefit from capital movements between two world’s largest economies.
Huge liquid capital markets in the Eurozone have the ability to absorb the large capital flows coming from the United States. When the ISM Non-Manufacturing figure is low, it usually results in dollar depreciation and Euro rally. Alternatively, sometimes the latest ISM data is in line with the previous month in which case the USD may remain unchanged as well.
Generally, if the ISM PMI number is higher than 50, it’s an indicator of a healthy and expanding economy. Conversely, when the ISM PMI figure is lower than 50 it signalises that economy is declining. The 50 mark is actually so significant that if the PMI is below it for two successive months, the economy is considered in a recession.
In conclusion, the ISM manufacturing index is very significant to Forex traders as this data has the ability to affect global currency prices. That’s why the ISM manufacturing, construction and services indicators can create rare trading opportunities, which means that understanding the ISM data and knowing how to trade it is vital.
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