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As a Forex trader, you know the power that economic data holds in confirming and killing a trade. One of the most powerful ones to watch out for? The ISM (Institute for Supply Management) report. This tiny slice of data is a big deal for the U.S. economy and, consequently, foreign currency markets. Mastering the art of reading and reacting to ISM reports can make you a serious Forex trading pro.
What is the ISM Report?
The ISM, or the Institute for Supply Management, is an American entity that distributes surveys to businesses as a way to take the temperature of economic activity. They issue reports on three big industries each month:
- Manufacturing – Published on the first business day of the month
- Construction – Published on the second business day
- Services – Published on the third business day
Indicators that track the above are new orders, employment, supplier lead times, production, and stocks. All the above are used to calculate a Purchasing Managers' Index (PMI) that is utilized by traders as a proxy for economic strength or weakness.
Why Should Forex Traders Care About ISM Data?
As it turns out, ISM releases inform us as to whether or not the American economy is increasing or decreasing in size. Any PMI over 50 indicates economic growth and below 50 indicates shrinkage. Since an healthy economy benefits the U.S. dollar, ISM release announcements will have the ability to cause huge price movements in Forex markets.
For example, if the ISM Manufacturing PMI is positive, the dollar will strengthen. However, when the report is weak, the dollar is sold by traders because they expect poor economic growth in the future.
How ISM Data Affects the Forex Market
ISM data is utilized by forex traders to predict the movement of the U.S. dollar relative to other currencies. This is how different results can affect the market:
Larger-than-expected ISM: When the PMI in ISM is higher than expected, the USD will appreciate. For example, if the PMI is expected to be 52 but prints 55, the USD pairs can be purchased on the expectation of further strengthening.
Weakness-in-expectations ISM: When the PMI in ISM is lower than expected, the USD can fall because investors sell on the expectation of economic slowdown.
In-line ISM data: If the PMI is as expected, the market reaction might be tame—except where there is a trend change indication in the long term.
How Forex Traders Make Smarter Trades Using ISM Data
Successful Forex traders don't react to ISM numbers, they predict them. Here's how they do it:
Compare Forecasts vs. Prior Data
Traders look at the previous month's PMI and economists' forecast. They might go long the USD before it is released if the new number is expected to be better.
Look at the Big Picture
ISM reports are only part of the story. Traders also look at jobs reports, inflation patterns, and geopolitics in an attempt to interpret market sentiment.
Prepare for Volatility
ISM expels quick fast moves, mostly in major USD crosses like EUR/USD, GBP/USD, and USD/JPY. Traders execute stop loss and take profit points to manage risk.
ISM versus Other Economic Major Reports
ISM reports need to be taken alongside other reports like Non-Farm Payrolls (NFP), durable orders, and growth of GDP. In aggregate, the reports help traders to generate a complete profile of economic wellbeing.
For example:
Strong ISM + Strong NFP = USD bullish
Weak ISM + Weak NFP = USD bearish
Mixed ISM and NFP = Uncertainty, with a need for more analysis
How ISM Affects Major Currency Pairs
EUR/USD: A strong ISM report will make the USD stronger and push EUR/USD lower. Weak data will tend to push EUR/USD higher.
GBP/USD: Similarly, a good ISM report will put pressure on GBP/USD, while bad data will try to support the pound.
USD/JPY: Since JPY is a safe-haven currency, bad ISM data will support the yen as investors want to hide.
Final Thoughts
If you are a Forex trader, you should make sure that you stay updated regarding ISM releases. It is essential that you understand how ISM releases impact currency markets since understanding this will allow you to make informed, better trades. By comparing ISM releases with other leading economic indicators, you can forecast market trends and make improved trades.
Set the pace by keeping track of ISM releases, integrating them into your plan, and responding to predicted market action. Good luck with your trade!
