Title: USD Advances Following Robust US Services Data; Market Eyes Fed’s Next Move
Original Article by Mitrade News Team
The US dollar strengthened across the board on Thursday after data showed that the country’s services sector expanded notably in August, raising expectations that the Federal Reserve might maintain interest rates at elevated levels for longer. Markets reacted swiftly, sending major currency pairs like EUR/USD and GBP/USD lower while bolstering USD/JPY and the Dollar Index (DXY).
This development is likely to influence Federal Reserve policy in the near future and has also added a fresh layer of volatility to currency markets that were already on edge due to global macroeconomic uncertainties. Below is a detailed breakdown of what happened, why it matters, and what it may mean for traders and investors.
Key Market Movers on September 5:
– A sharp rebound in the US ISM Services PMI for August ignited a rally in the US dollar.
– Major currencies like the euro, pound, and yen lost ground against the greenback.
– Treasury yields rose as rate hike expectations were recalibrated.
– Federal Reserve officials remain cautious, keeping all options on the table for the upcoming FOMC meetings.
US Services PMI Comes in Strong
The US Institute for Supply Management (ISM) reported that the Non-Manufacturing Purchasing Managers Index (PMI) rose to 54.5 in August, beating expectations of 52.5 and a notable improvement over July’s reading of 52.7. This marks the eighth consecutive month of expansion in the services sector.
The reading above 50 indicates growth in the largest component of the US economy, and the stronger-than-expected figure reinforces perceptions of economic resilience despite previous signs of slowing inflation and tepid manufacturing output.
Notable details from the ISM Services PMI report:
– Business Activity Index: Increased to 57.3 from July’s 57.1
– New Orders Index: Climbed to 57.5 from 55.0
– Employment Index: Rose to a narrowing 54.7 from 50.7, suggesting strong hiring efforts
– Prices Paid Index: Remained elevated at 58.9, signaling continued inflationary pressures
These strong sub-index readings suggest ongoing momentum in the services sector, especially in areas like consumer spending, transportation, and healthcare. Analysts have interpreted this as a sign that the economy remains robust, defying predictions of a sharp slowdown in the second half of the year.
What It Means for the Federal Reserve
The surprising strength in service activity has complicated the Federal Reserve’s balancing act between curbing inflation and avoiding a recession. While inflation pressures appeared to ease somewhat in recent months, the latest PMI figures raise concerns that sticky price pressures might persist, especially in labor-intensive industries like consumer services and leisure.
Federal Reserve Chairman Jerome Powell previously highlighted the importance of service-sector inflation in his Jackson Hole speech. Given the new data, markets now believe that the Fed will adopt a “higher-for-longer” stance on interest rates, meaning no near-term rate cuts and the possibility of further tightening.
Market pricing now reflects the following probabilities:
– Roughly 93% chance that the Fed will leave rates unchanged in the September 20 FOMC meeting
– Around 48% probability that the Fed could raise rates by another 25 basis points by November
– Increased expectation for elevated rates well into 2024
These shifting expectations have affected the yield curve, with short-term Treasury yields climbing, thereby enhancing the appeal of the US dollar for international investors seeking safe, interest-income-driven assets.
Currency Market Reactions
Following the release of the ISM Services PMI, the US dollar gained traction against most major currencies. Here’s how:
EUR/USD:
– Dropped by 0.76% to close near 1.0700
– The euro was also pressured by weak Eurozone data earlier in the week, including lower inflation in Germany and Spain
GBP/USD:
– Fell by 0.65%
Read more on EUR/USD trading.