FX Update: ISM Services doesn’t fit US deceleration narrative.

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Today's Market Quick Take from the Saxo Strategy Team

FX Trading focus: The greenback jolted back stronger as November US ISM Services survey fails to support the softening inflation/economy narrative. Still a long wait for next week’s US CPI/FOMC.

The market expected yesterday’s November ISM Services survey to prove that the key US services sector is decelerating, with a reading a point or so below the cycle (since early 2020 pandemic breakout panic) low of 54.4 in October. Instead, we got a far stronger print of 56.5, a still-hot Prices Paid sub-index at 70.0, hardly below October’s 70.7, and an Employment sub-index that edged back into expansion at 51.5 vs. 49.0 expected. It’s a data point that pushes back against the market’s “lean” after the indifferent Powell speech last week, the comfortably quiet October PCE inflation data point and a November jobs report that provided room for two-way interpretation (weak household survey, average hourly earnings only hotter than expected due to small shift in average weekly hours worked denominator as outlined in yesterday’s FX Update.) But while the ISM Services data points is enough to give the market some pause, the key test for the rest of the year remains next Tuesday’s November CPI print and the FOMC meeting the following day. The Wall Street journal’s Nick Timiraos chimed in yesterday with a piece suggesting that the Fed is set to raise the dot plot forecasts for next year at the FOMC meeting: Fed to weigh higher interest rat next year while slowing rises this month. I’ll consider the specifics of the FOMC meeting next Wednesday in coming updates, but it will take more than a 2023 Fed dot plot forecast shift to sustain a significant USD comeback, it will take further incoming data like yesterday’s ISM Services that suggest not only a resilient US economy, but ongoing risks that inflation will prove persistent.

Chart: EURUSD
The EURUSD chart fairly representative of the broader US dollar picture here. The pair spilled higher still, nearly scraping 1.0600 before the strong US ISM Services report yesterday saw the price action pushed back lower on a surge in US treasury yields. . It’s arguably a local reversal, but a more severe reversal would require a more significant wipe-out of the recent rally wave, perhaps 1.0400 or below. As well, we have the difficult wait for the next important incoming US data, the November CPI print next Tuesday, and the FOMC meeting the following day. Still, the recent rally sequence accomplished a nearly 38.2% consolidation of the entire sell-off wave from the 2021 top of 1.2349, falling only a few pips short of the 1.0611 target for that retracement. Hard to see incoming data shifting the outlook here until next week, as we may settle into a range here, one that extends to 1.0223 if the pair closes south of perhaps 1.0400. But today, the USD rally has been oozing out of the US dollar as US yields are also slowly unwinding yesterday’s reaction to data. The US 10-year yield likely remains a very important coincident indicator for EURUSD.