US July ISM Services PMI Preview

The dollar has been having a difficult time finding demand amid disappointing macroeconomic data releases and the Fed’s decision to abandon rate guidance. The US Bureau of Economic Analysis’ initial estimate showed that the US economy contracted at an annualized rate of 0.9% in the second quarter and the probability of a 75 basis points (bps) Fed rate hike in September dropped below 20%.

The Institute of Supply Management (ISM) will release the Non-Manufacturing Purchasing Managers’ Index (PMI) – also known as the ISM Services PMI – at 17:00 GMT+3 this Wednesday. The gauge is expected to edge lower to 54.5 in June from 55.9 in the previous month. Given that the Fed looks more at inflation than growth, investors will keep a close eye on the Prices Paid sub-component, which is expected to rise to 83.9 from 82.1 in May.

Market participants are likely to react to inflation developments rather than the overall state of the service sector unless the headline PMI diverges from the market consensus in a significant way. A Services PMI reading below 50 should escalate inflation fears and cause markets to continue to scale down hawkish bets. On the other hand, an unexpected jump could open the door for a USD rebound but such a reaction should remain short-lived.

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