The ISM Manufacturing Index plays a vital role in forex trading as ISM data affects currency prices worldwide. As a result, the ISM Manufacturing, Construction, and Services indicators can present unique opportunities for Forex traders, making understanding this data (and preparing for its monthly release) crucial.
What is ISM data?
The Institute for Procurement Management (ISM) measures economic activity both on the manufacturer and service sides. The monthly ISM data releases contain essential information, such as changes in production levels.
Founded in 1915, ISM is the world’s first management institute with members in 300 countries. The data collected from its large membership of purchasing managers means that ISM is a reliable guide to global economic activity and, consequently, currency prices. A country’s economy is often driven by its supply chain, as a result of which the monthly ISM PMI for manufacturing and non-manufacturing economic news is closely watched by forex traders around the world.
The importance of ISM surveys
ISM releases three surveys – Manufacturing, Construction and Services – on the first business day of each month. The ISM Purchasing Managers Index (PMI) is compiled from surveys of 400 purchasing managers in the manufacturing sector. These purchasing managers from different industries represent five different areas:
- Stocks
- Occupation
- Speed of supplier deliveries
- Production level
- New orders from customers
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 publications to determine the risks at any given time in the market.
How does ISM affect currencies?
Manufacturing and non-manufacturing PMIs are major market movers. When these reports come out at 10:30 am ET, currencies can become very volatile. Because these economic releases are based on the previous month’s historical data, collected directly from industry experts, forex traders can determine whether the US economy is expanding or contracting – similar to nonfarm payrolls (NFP) data.
Currencies react to this information as it is a measure of US economic health (see image below).
How forex traders use ISM data
Forex traders will compare the previous month’s ISM data with the forecast numbers released by economists. When the released PMI number is better than the previous number and higher than the forecast number, the US Dollar tends to rally. This is where fundamental and technical analysis come together to create a trade setup.
When an economic release beats expectations, sharp rapid moves can result. Traders often choose the euro as their “counter-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 enormous waves of capital seeking refuge from the US. A weak US ISM Non-Manufacturing number usually leads to a Dollar sell-off and a rise in the Euro.
Another scenario is if the published number is as forecast and/or unchanged from the previous month, then the US Dollar may not react to the number at all.
Overall, an ISM PMI number above 50 indicates that the economy is expanding and healthy. However, a number below 50 indicates that the economy is weak and shrinking. This number is so crucial that when the PMI is below 50 for two consecutive months, an economy is considered to be in recession.
Eurozone PMIs are also compiled by Markit Group, while US regional and national PMIs are compiled by ISM. As you can see, traders have every reason to pay close attention to the major releases from the ISM manufacturing index.
Important: Be aware of other critical fundamental releases such as the consumer price index (CPI), producer price index (PPI), and non-farm payrolls (NFP).
