The foreign exchange (Forex) market as we know it today is moved by several economic data released during the month. These data are popularly known today as fundamental factors that drive large volatility in the market. One such important economic data is one released by the Institute for Supply Management (ISM) during the first working day of each new month. ISM report is used in measuring the strength of the production industry based on purchases made by the purchasing managers.
The major challenge faced by traders today is determining the impact of this ISM report on the different currency pairs, especially those paired with the US dollar. This work has taken time to explore the meaning of this ISM data released monthly and the major impacts it exerts on the market whenever the data is released.
Meaning of Forex traders
Forex traders refers to foreign exchange dealers. The term covers any trader who engages in the buying and selling of foreign currencies or assets either directly from the market or using the forex brokers for beginners as intermediaries.
What is ISM data
The ISM data popularly known as the ISM Manufacturing PMI is important economic data prepared by the Institute for Supply Management and usually released on the first business day of each new month. This data is known to measure the monthly difference in the average purchases made by the purchasing managers within the manufacturing sector.
The outcome of this data is usually used to measure the strength of the US economy. For instance, any reading from this report above 50.0 signifies an industrial expansion based on the fact that the purchasing managers have made more purchases for production in the previous month. While a lower reading below 50.0 signals a reduction in the purchases made by the purchasing managers. This means there would be a possible reduction in the production rate in the new month.
Often the ISM Manufacturing PMI is prepared by sampling the opinions of over 300 different purchasing managers chosen randomly from the different production companies spread across the 50 states making up the United States. These purchasing managers are requested to give their opinions on the current level of business advancements made by their companies in the concluded month. This includes new purchases, pending supplies, and deliveries, prices of products, possible employment, and inventories.
How do Forex Traders use the ISM data for forex trading?
The monthly report released by the ISM Manufacturing PMI is an important economic data that every forex trader today always paid great attention to. This is because the outcome of this data is known to exert great influence in the forex market based on the readings.
Higher readings from the ISM Manufacturing PMI report above 50.0 points to an expansion in the manufacturing activities expected for the coming month. With increased industrial production, the stock market would be expected to rally in the new month.
Added to this, an increased industrial production will further create more demands for the US dollar in the exchange market. This means the dollar index would benefit immensely whenever there are higher readings from the ISM Manufacturing PMI report every new month.
On the reverse, lower readings from the ISM Manufacturing PMI report especially below 50.0 simply points to an industrial contraction and possible slowdown in the production rate for the new month. This will reduce the performance of the stock market in the new month and further weaken the dollar index. Of course, all the currency pairs crossed with the US dollar always benefit whenever the dollar index weakens.