The ISM manufacturing index, a closely watched indicator for US factory activity and thus a growth barometer will come into the light on Monday at 1500 GMT. The figure is expected to show that manufacturers regained some lost ground in November, retaining the streak of overall robust growth for months now. An upbeat report could reflect that the US is expanding at a healthy pace in the final quarter despite trade frictions and a slowing global economy.
According to forecasts, the ISM manufacturing PMI has risen a little bit in November to a reading of 57.8 from 57.7 in October. While this is below the 34-year high of 61.3 registered in September, it is still comfortably above 50, the threshold which separates contraction from expansion in the industry. If this is indeed the case, markets could feel more confident that GDP growth in the final quarter will remain robust and above the 3.0% target for 2019 set by the US administration.
Yet, given the ongoing trade war and the fact that Trump’s Republicans don’t have the full control of Congress anymore to comfortably pass additional tax cuts, questions remain about how long the US could support manufacturers against a slowing global economy which could sooner or later drain demand for exports. Two days ago, the Bureau of Economic Analysis confirmed that GDP growth pulled back to 3.5% q/q after jumping by 4.2% in Q2, the strongest pace of growth over the past four years. A deceleration in personal consumption expenditures and a downturn in exports contributed to the weakness, offsetting higher business spending on equipment.
Should Trump fail to reach a trade compromise with his Chinese counterpart by the end of the year, US businesses could face higher taxes when importing goods from China in January and thus narrower profit margins.
Turning to FX markets, traders continue to favour the dollar amid political risks in Europe and optimism over the still solid path of the US economy despite the Fed chief Powell communicating this week that the Fed could turn more cautious on interest rates in 2019. A better-than-expected ISM manufacturing index on Monday could help the pair crawl up to 114.20 where it found resistance on November 12, while a leg higher may also touch the 114.54 top before the 115 barrier comes under the radar.
On the other hand, if the numbers detect further deterioration in manufacturing conditions, the pair may return to the 113 round level, where the 50-day simple moving average (SMA) is currently approximately standing. Slightly lower, the price may pause between the 38.2% Fibonacci of 112.72 and the 50% Fibonacci of 112.15 of the up-leg from 109.76 to 114.54. A stronger sell-off could emerge below the 61.8% Fibonacci of 111.58.
On Monday, investors will be scrutinising the outcome of the G20 summit which kicks off today in Argentina and particularly the trade discussions between the US President and his Chinese counterpart. Positive trade news may pull funds away from safe-haven assets such as the dollar and the yen.
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