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ISM PMIs Could Upset Dollar if Virus Impact Confirmed

The deterioration in the US preliminary IHS Markit PMI survey in February was partially attributed to the coronavirus outbreak and markets are now turning their attention to the more important ISM PMI indices for release on Tuesday (manufacturing) and Thursday (non-manufacturing) at 15:00 GMT to confirm potential disruptions in US business activities. Should the numbers ratify concerns, especially those for the services sector, the sliding dollar may push for more losses.

ISM services PMI may not show contraction after all 

The deadly Covid-19 disease is spreading fast outside China’s borders and with more than 40 countries being infected, the US, which has also caught the virus, is worried that it may not see its businesses recovering from the trade uncertainty as it wished for this year.

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The narrative is that if the virus is not soon contained, more quarantines, business closures and air and road restrictions are likely to follow, reducing demand for US products and hence income for US companies. February’s IHS Markit preliminary survey was the first to unveil the burden last week, showing that the US services sector which had been expanding since October entered the contraction area, while the manufacturing sector continued to weaken, barely avoiding a negative month.

In contrast, next week’s ISM PMI figures, which are more closely watched by the Fed, are expected to have milder adjustments. Particularly, the ISM manufacturing PMI, which managed to return to expansion after five months in January, is said to have eased to 50.5 from 50.9, while the services PMI is said to have stayed steady at 55.5, comfortably above the 50 threshold that separates growth from contraction.

If forecasts prove right, especially for the services sector, or at least message that no sector is shrinking, some faith could be restored in the US economy, making the case for a weaker GDP growth in the first quarter less likely. Consequently, the need for three 25 bps rate cuts this year which is currently fully priced in by the markets could appear exaggerated, while investors may also play down the scenario of a sharper 50 bps rate cut by the Fed on March 18.

Technical view on dollar

Turning to FX markets, such news could allow the struggling dollar to recoup some lost ground before it potentially faces additional volatility from the Nonfarm payrolls report on Friday. Looking at USDJPY, a bounce back above the broken ascending trendline and the 109.25 level could return some buyers into the market, while slightly higher, the 109.70-110.00 restrictive area will be in focus as well.

On the flip side, USDJPY may search for new lows below the 200-day simple moving average and near 107.80 if the ISM PMI survey confirms Markit’s discouraging signals for the services sector, or worse, presents more worrisome numbers. The odds for a more aggressive rate reduction would also turn up if the employment report on Friday disappoints, with the 107.00 round-level being in the spotlight as well.