How Forex Traders Use ISM Data

The ISM manufacturing index plays an important role in forex trading, with ISM data influencing currency

prices

globally. As a result, the ISM manufacturing, construction and services indicators can provide unique opportunities for forex traders, which makes understanding this data (and how to prepare for its monthly release) essential.

Talking points:

• What is ISM?
• How ISM impacts currencies
• How forex traders use ISM data

What is ISM?

The Institute for Supply Management (ISM) measures the

economic activity

from both the manufacturing side as well as the service side. Monthly ISM data releases include key information such as changes in production levels.

ISM was formed in 1915 and is the first management institute in the world with members in 300 countries. The data gleaned from its large membership of purchasing managers means ISM is a reliable guide to global economic activity, and as a result, currency prices. A country’s economy is often determined by its supply chain, as a result, the monthly ISM manufacturing and non-manufacturing PMI

economic news releases

are carefully watched by forex traders around the world.

ISM Surveys

ISM publishes three surveys – manufacturing, construction, and services – on the first business day of every month. The ISM Purchasing Managers Index (PMI) is compiled from surveys of 400 manufacturing purchasing managers. These purchasing managers from different sectors represent five different fields:

1. Inventories
2. Employment
3. Speed of supplier deliveries
4. Production level
5. New orders from customers.

In addition, ISM construction PMI is released on the second business day of the month, followed by services on the third business day. Forex traders will look to these releases to determine the risks at any given time in the market.

How does ISM Impact currencies?

The Manufacturing and Non-manufacturing PMIs are big market movers. When these reports are released at 10:30am ET, currencies can become very volatile. Since these economic releases are based on the previous month’s historical data gathered directly from industry professionals, forex traders can determine if the US economy is expanding or contracting – much like

non-farm payrolls (NFP

) data.

Currencies react with this information as it represents a gauge of US economic health (see image below).

Source: Institute for Supply Management

How forex traders use ISM data

Forex traders will compare the previous month’s ISM data figure with the forecasted number that economists have published. If the released PMI number is better than the previous number and higher than the forecasted number, the

US dollar

tends to rally. This is where

fundamental and technical analysis

comes together to create a trade setup.

EUR/USD

drops as a result of better than expected data

In the example above, notice how the better than expected PMI number triggered a

US dollar

rally against the

Euro

. As seen in the chart (

EUR/USD

– one hour), the ISM Manufacturing PMI came in higher than the previous month at 54.9.

When an economic releases beats expectation, sharp fast moves can ensue. In this case, EUR/

USD

dropped 150 pips in a few hours. Traders often choose the Euro as the “anti-dollar” to take advantage of capital flows between two of the largest economies.

Read more on using

pips

in forex trading.

The Eurozone has large liquid capital markets which can absorb the huge waves of capital seeking refuge from the US. A weak US ISM Non-Manufacturing number usually leads to a

dollar

sell-off and a rise in the

Euro

. Another scenario is when the number released is in line with forecasts and/or unchanged from the previous month, then the US dollar may not react at all to the number.

Overall, an ISM PMI number above 50 indicates that the economy is expanding and is healthy. However, a number below 50 indicates that the economy is weak and contracting. This number is so important that if the PMI is below 50 for two consecutive months, an economy is considered in recession.

PMIs are also compiled for Euro zone countries by the Markit Group while US regional and national PMIs are compiled by ISM. As you can see, traders have good reason to pay special attention to the important releases from the ISM manufacturing index.

Learn more about forex fundamentals

• Take note of other key fundamental releases such as

  
  Consumer Price Index (CPI)
  

  ,

  
  Producer Price Index (PPI)
  

  and

  
  Non-Farm Payrolls (NFP)
  

  .

• Keep an eye on

  
  market news
  

  for the latest updates on currency prices, or bookmark our

  
  economic calendar
  

  to prepare for upcoming events.

• Our live

  
  trading webinars
  

  cover various topics related to the forex market like PMI data, currency news, and technical chart patterns.

• We also recommend viewing our

  
  Traits of Successful Traders guide
  

  to discover the secrets of successful forex traders.