**U.S. Dollar Strengthens Following Better-Than-Expected ISM Manufacturing PMI Report: In-Depth Analysis for EUR/USD, GBP/USD, USD/CAD, and USD/JPY**
*Original article by James Hyerczyk, adapted and expanded for deeper insight*
The U.S. dollar surged on Monday, after the Institute for Supply Management (ISM) released a stronger-than-expected Manufacturing Purchasing Managers’ Index (PMI) for May. The rebound in the greenback came amid market uncertainty surrounding inflation in the United States and its potential impact on Federal Reserve interest rate policy. This article delves deeply into how the dollar’s performance was influenced by the ISM data and explores its effects on major currency pairs, including EUR/USD, GBP/USD, USD/CAD, and USD/JPY.
## ISM Manufacturing PMI Surprises to the Upside
The ISM Manufacturing PMI for May clocked in at 48.7, exceeding the market forecast of 48.0. Although the sector remains in contraction (a reading below 50), the figure marks an improvement from April’s level and sparked optimism about the resilience of the U.S. economy.
Key highlights from the ISM report:
– **New Orders Index** rose to 45.4 from 45.1
– **Employment Index** increased to 51.1 from 48.6, signaling job growth in manufacturing
– **Prices Paid Index** fell to 57.0 from 60.9, suggesting input cost inflation might be easing
Even though the U.S. manufacturing sector remains in contraction territory, the uptick indicates that conditions could be stabilizing. Importantly, this development comes amid a critical juncture for the U.S. Federal Reserve, which is evaluating incoming data to assess the appropriate timing for interest rate cuts.
## Market Implications: What This Means for Fed Policy
The Federal Reserve has taken a cautious stance on rate cuts amid persistent inflation pressures. While parts of the economy, such as the service sector, remain buoyant, the central bank has reiterated the need for further evidence of inflation declining toward its 2 percent target. The relatively upbeat PMI report adds complexity to the Fed’s decision-making process.
According to CME Group’s FedWatch Tool, prior to the ISM report, markets were pricing in a nearly 52 percent chance of a Fed rate cut in September. Post-release, that probability dropped slightly, showing that investors are recalibrating expectations due to signs that the economy is not weakening as quickly as previously thought.
## U.S. Dollar Index (DXY) Reacts Positively
The U.S. Dollar Index (DXY), which measures the dollar against a basket of six major currencies, rose around 0.58 percent to reach 104.47 during Monday’s session. That recovery followed a four-day losing streak fueled by soft inflation data and signs the Fed may soon shift policy.
Contributing factors to the dollar’s rally:
– Stronger-than-expected economic data boosting confidence in U.S. resilience
– A moderation in inflationary pressures giving the Fed breathing room
– Investors rotating back into USD-denominated assets given uncertain global conditions
With Treasury yields also rising on Monday — the U.S. 10-year yield climbing to 4.45 percent — demand for the dollar among investors seeking yield is back on the upswing.
## EUR/USD: Euro Under Pressure
The euro came under pressure following the upbeat ISM data, as the interest rate divergence narrative reasserted itself. The EUR/USD pair declined to around 1.0880 after testing highs near 1.0915 earlier in the session.
Factors influencing EUR/USD performance:
– The European Central Bank (ECB) is expected to begin cutting interest rates at its June meeting
– Softening economic data in Germany and Italy continues to cloud the Eurozone’s recovery outlook
– ECB policymakers, including President Christine Lagarde, have hinted at a dovish shift due
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