Breaking: US ISM Manufacturing PMI surprised to the downside in February

• The US ISM Manufacturing PMI missed consensus in February.
• The US Dollar remains well on the defensive on Monday.

Data from the Institute for Supply Management (ISM) show the Manufacturing PMI receding to 50.3 in February, down from 50.9 in the previous month and falling behind analysts’ forecasts of 50.5.

Meanwhile, the Prices Paid Index—which tracks inflation—advanced to 62.4 from 54.9, the Employment Index ticked lower to 47.6 from 50.3, and the New Orders Index deflated to 48.6, from 55.1.

Market reaction

The Greenback maintains its downbeat performance at the beginning of the week, motivating the US Dollar Index (DXY) to deflate to the 106.60 region.

This section below was published as a preview of the US ISM Manufacturing report for January at 09:00 GMT.

• The US ISM Manufacturing PMI is expected to tick a tad lower in February.
• Investors will also follow the ISM Prices index and the Employment index. 
• EUR/USD came under pressure and broke below the 1.0400 level.

Anticipation is mounting as the Institute for Supply Management (ISM) gears up to unveil the February United States (US) Manufacturing Purchasing Managers’ Index (PMI) this Monday. This crucial report serves as a vital indicator of the health of the US manufacturing sector, while also offering a window into the broader economic outlook.

Key points to keep in mind:

• PMI benchmarks: A reading above 50.0 signals an expanding manufacturing sector, whereas a value below 50.0 indicates contraction.
• Analyst predictions: Experts are forecasting a February PMI of 50.8, marginally below January’s 50.9. Following this slight downtick, the index is still expected to remain within the expansion zone.
• Economic resilience under pressure: It’s worth noting that while the manufacturing sector showed signs of expansion, the health of the overall economy has been put to the test amid some loss of momentum in key fundamentals in past weeks, pouring cold water over the economic "exceptionalism" of the US.

This report not only reflects the pulse of the manufacturing area but also hints at the evolving narrative of the wider economy.

What to expect from the ISM manufacturing PMI report?

In January, the manufacturing sector continued its upward momentum for the third straight month, fueled by improvements in the ISM Manufacturing PMI. Several key components contributed to this optimistic picture:

New Orders surge: The New Orders Index continued to climb, signaling that manufacturers are receiving an increasing number of orders.

Production rebound: The Production Index bounced back into expansion territory for the first time since April 2024, indicating that factories have ramped up their output.

Rising costs: The Prices Index continued its upward trend in January—the fourth straight month of rising prices—likely reflecting buyers locking in and deploying their pricing strategies for 2025.

Backlog of orders: The numbers dipped slightly—from 45.9 in December to 44.9 in January, marking a 1 percentage point decrease. This continues a trend, marking the 28th month in a row where order backlogs have fallen, with none of the six largest manufacturing sectors seeing an increase in their order books in January 2025.

Employment gain: After contracting for 14 of the past 16 months, the Employment Index rebounded in January, climbing to 50.3 and signaling a return to expansion.

Generally, a PMI reading above 50 percent indicates that the manufacturing sector is growing, while a reading below 50 percent signals contraction. However, even levels above 42.5 percent over time can point to broader economic expansion.

Overall, the strength in manufacturing could boost high-yield assets like stocks, as investors become more optimistic about growth prospects. Meanwhile, the US Dollar (USD) might experience selling pressure as market confidence grows and investors shift toward riskier assets. Additionally, indicators such as rising new orders and easing price pressures are positive signs that could further propel economic expansion.

When will the ISM Manufacturing PMI report be released and how could it affect EUR/USD?

The ISM Manufacturing PMI report is scheduled for release at 15:00 GMT on Monday. Ahead of the data release, EUR/USD accelerated its bearish tone and slipped back to the 1.0380 zone to print new two-week lows, and is showing some difficulty in returning to the area beyond the 1.0400 barrier on a sustained basis.

Pablo Piovano, Senior Analyst at FXStreet, explained that the continued downward trend is likely to steer EUR/USD back toward its 2025 low of 1.0176, which was set on January 13. He mentioned that if this level breaks down further, it could signal a bearish turn, pushing the pair back to the critical parity zone.

Piovano also noted that on the upside, the pair faces a bit of resistance at the 2025 high of 1.0532 recorded on January 27. If the pair manages to break through this barrier, traders might see it surge toward the December 2024 top of 1.0629, especially once the Fibonacci retracement level of the September-January decline at 1.0572 is cleared.

Piovano added that the negative outlook is likely to persist as long as the spot trades below its key 200-day SMA at 1.0729.

He also pointed out that the Relative Strength Index (RSI) dropped to around 47, indicating a pick-up in the bearish stance, while the Average Directional Index (ADX) below 13 suggests that the current trend is weakening.