**U.S. Dollar Strengthens as ISM Services PMI Surges Past Expectations: In-Depth Analysis of EUR/USD, GBP/USD, USD/CAD, and USD/JPY**
*Based on original reporting by Vladimir Zernov for FXEmpire.*
On June 5, 2024, the U.S. dollar rallied sharply against major currencies after a stronger-than-expected ISM Services PMI reading fueled optimism about the resilience of the U.S. economy. The greenback surged in value as traders recalibrated their expectations for Federal Reserve monetary policy going forward. Markets are now seeing signs that the Fed may stay on a higher-for-longer interest rate path, especially if upcoming inflation data shows continued signs of stickiness.
Let’s dive into the key factors behind the U.S. dollar rally, analyze the ISM Services PMI report that triggered the move, and examine how major currency pairs like EUR/USD, GBP/USD, USD/CAD, and USD/JPY responded.
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## ISM Services PMI Exceeds Forecasts, Boosting Dollar
On Tuesday, the Institute for Supply Management (ISM) released its Non-Manufacturing Purchasing Managers Index (PMI) for May. The index came in at 53.8, significantly stronger than market forecasts of 51.0 and well above the April figure of 49.4.
### Highlights from the ISM Services PMI Report:
– **Headline PMI**: 53.8, signalling expansion in the service sector economy after a brief contraction in April.
– **Business Activity Index**: Increased to 61.2, up 10.3 percentage points from April, suggesting strong growth in overall services output.
– **New Orders Index**: Rose to 54.1, up from 52.2 in the previous month, indicating rising demand.
– **Employment Index**: Slightly contracted at 47.1, compared to April’s reading of 45.9, showing continued weakness in service sector hiring.
– **Prices Index**: Registered 58.1, down slightly from April’s 59.2, still implying inflationary pressures remain in the service sector.
The stronger-than-expected headline PMI indicates that the U.S. services sector, which accounts for more than two-thirds of the country’s GDP, remains in robust health. Despite a slight drag from soft employment figures, both new orders and business activity surged, reinforcing confidence in the broader economic outlook.
More importantly, the high prices index pointed to ongoing inflation in service-based sectors, which bolsters the case for the Federal Reserve maintaining elevated interest rates.
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## Immediate Market Reaction
The release of the ISM data sent shockwaves throughout the currency markets:
– The **U.S. Dollar Index (DXY)** jumped from intraday lows around 104.00 to trade above 104.50 as sentiment shifted sharply in favor of the dollar.
– U.S. Treasury yields rallied, with the 10-year note rising toward 4.34 percent, reflecting new expectations that the Fed may not cut interest rates as early or as aggressively as previously assumed.
– Equity markets fell as concerns over tighter monetary conditions grew. The S&P 500 closed down on the day, with interest rate-sensitive sectors like technology posting losses.
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## Federal Reserve Rate Outlook Adjusts
The surprising strength of the ISM services report and continued pricing pressures prompted a shift in Fed rate cut expectations:
– As of June 5, the **CME FedWatch Tool** showed markets pricing in just **one 25-basis-point rate cut** by the end of 2024, down from two or three cuts earlier this month.
– Traders and analysts await the **Federal Open Market Committee (FOMC) meeting** scheduled for next week, along with **May’s CPI inflation report** to solidify policy guidance.
According to Nomura’s economics team, “this print reduces chances of a near-term recession, significantly dampening the case for aggressive Fed
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