Will PMI data confirm the good health of the US economy?

The S&P Global flash PMIs for July are seen improving further, suggesting the US economy continued to expand.
Markets expect the Federal Reserve to keep its interest rates unchanged at the end of the month.
EUR/USD manages to regain some pace and flirts with the 1.1700 area.

S&P Global will release on Thursday its preliminary July Purchasing Managers’ Indices (PMIs) for the United States, based on surveys of top private sector executives, to provide an early indication of economic momentum.

The report includes three measures: the Manufacturing PMI, the Services PMI, and the Composite PMI (a weighted combination of the two), each calibrated such that numbers above 50 indicate growth and readings below that threshold indicate contraction.

These monthly snapshots, released far ahead of many official figures, analyse everything from production and export patterns to capacity utilisation, employment, and inventory levels, offering some of the earliest signs of the economy’s direction.

The Composite PMI ticked down marginally to 52.9 in June from 53.0 the previous month. According to Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, “The US service sector reported a welcome combination of sustained growth and increased hiring in June but also reported elevated price pressures, all of which could add to pressure on policymakers to remain cautious with regard to any further loosening of monetary policy.”

What can we expect from the next S&P Global PMI report?

Investors anticipate a little increase in July’s flash Manufacturing PMI from 52.0 to 52.5, while the Services PMI is projected to rise from 52.9 to 53.0.

Although a minor decline may not scare markets, any resilience – or rebound – above the 50-point level might alleviate lingering economic fears, particularly if service sector momentum remains strong.

Investors will focus on the PMIs’ granular inflation and employment measures. Fed Chair Jerome Powell has said that inflation is projected to accelerate in reaction to US tariffs, causing the Federal Reserve (Fed) to adopt a cautious tone. Despite some Fed officials suggesting a quarter-point rate decrease as early as later this month, the market consensus expects the Fed to stay on the sidelines.

A significant upside surprise in the services PMI, along with a strong print from the manufacturing gauge, would likely bolster the US Dollar by confirming the idea of a healthy economy, hence supporting the Fed’s conservative attitude.

In contrast, evidence of easing pricing pressures and weak private sector hiring might reignite prospects for more monetary easing, weighing on the US Dollar.

When will the July flash US S&P Global PMIs be released, and how could they affect EUR/USD?

The S&P Global Manufacturing, Services, and Composite PMIs report will be released at 13:45 GMT and is expected to show US business activity extending the gain of momentum observed in the last readings.

Ahead of the release, Pablo Piovano, Senior Analyst at FXStreet, warns that the continuation of the ongoing recovery of the EUR/USD pair could see it challenge its yearly peak of 1.1830 (July 1), ahead of the September 2021 high at 1.1909 (September 3), and the critical milestone at 1.2000.

Alternatively, Piovano notes that the resurgence of the selling pressure should meet initial support at the monthly floor of 1.1556 (July 17), prior to the interim 55-day Simple Moving Average (SMA) at 1.1491, and the weekly base of 1.1445 (June 19).

“While above the 200-day SMA at 1.0910, the pair’s bullish stance should remain unchanged,” Piovano adds.

US Dollar FAQs

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

Economic Indicator

S&P Global Services PMI

The S&P Global Services Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US services sector. As the services sector dominates a large part of the economy, the Services PMI is an important indicator gauging the state of overall economic conditions. The data is derived from surveys of senior executives at private-sector companies from the services sector. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), industrial production, employment and inflation. A reading above 50 indicates that the services economy is generally expanding, a bullish sign for the US Dollar (USD). Meanwhile, a reading below 50 signals that activity among service providers is generally declining, which is seen as bearish for USD.