**U.S. Dollar Retreats as ISM Services PMI Falls Flat: Implications for EUR/USD, GBP/USD, USD/CAD, and USD/JPY**
Original article by Vladimir Zernov via FX Empire.
The U.S. dollar staged a broad retreat following the release of the latest ISM Services PMI report, which showed a significant slowdown in the services sector. The data came in weaker than expected, leading investors to reassess the economic outlook and the Federal Reserve’s potential response regarding interest rates. In currency markets, this led to notable movements in major USD pairs including EUR/USD, GBP/USD, USD/CAD, and USD/JPY.
This article explores the impact of the ISM Services PMI data on the U.S. dollar and analyzes the implications for major forex pairs, incorporating real-time market sentiment and supplemental analysis from multiple reliable sources.
## ISM Services PMI Comes in at 50.0: A Sign of Trouble?
On Wednesday, the Institute for Supply Management (ISM) reported that its Services Purchasing Managers’ Index (PMI) fell to 50.0 in May 2024, down from 51.9 in April. This reading lands exactly at the threshold that separates expansion from contraction and was below analysts’ expectation of 51.0.
### Key Takeaways from the ISM Services PMI Report:
– **Headline PMI**: 50.0, compared to the forecast of 51.0 and previous reading of 51.9
– **Business Activity Index**: 51.5, down from 54.0
– **New Orders**: Declined to 52.2 from 56.1
– **Employment Index**: Dropped to 47.1, marking a contraction in services employment
– **Prices Paid Index**: Fell to 58.1, indicating easing inflation in service inputs
This report follows similarly weak manufacturing data released earlier in the week. Taken together, the decline in both sectors suggests that the U.S. economy is cooling down under the weight of high interest rates and persistent inflation pressures.
## Immediate Market Reaction: U.S. Dollar Weakens
Markets reacted quickly to the ISM Services PMI data. Treasury yields dropped sharply as investors recalibrated their interest rate expectations. The 2-year Treasury yield, which is particularly sensitive to Fed policy expectations, fell to around 4.70%, from nearly 4.85% before the release of the report. The benchmark 10-year yield also dipped below 4.30%.
The U.S. Dollar Index (DXY), which measures the greenback’s value against a basket of currencies, declined by 0.35% following the data, sliding to 104.10. This drop reflected broad-based weakness in the dollar and lifted major counterparts like the euro, pound, and yen.
## Fed Rate Cut Expectations Grow
The soft service-sector data pushed traders to increase bets on Federal Reserve rate cuts later in 2024. According to the CME FedWatch tool:
– There is now over a 70% probability of a 25 basis point rate cut by September 2024.
– Prior to the ISM data release, markets were pricing in a less than 60% chance of a rate cut in September.
– Expectations for two rate cuts by the end of 2024 have also grown stronger.
Analysts now believe that the Fed will have to act sooner than anticipated if economic data continues to weaken, all while inflation shows signs of easing. Lower interest rates would typically weaken the dollar, providing relief for foreign currencies and emerging markets.
## EUR/USD: Breakout Strengthens Euro’s Position
The euro gained traction against the weakening dollar, with EUR/USD rising above the 1.0880 resistance zone and testing the 1.0900 level. The pair moved into positive technical territory, benefiting from both dollar weakness and relatively resilient Eurozone economic data.
### Key Catalysts for EUR/USD:
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