Forex Market Update: Dollar Gains Momentum Following Unexpected Growth in ISM Manufacturing

The foreign exchange markets burst back to life after the holiday lull during the early US session, with the Dollar surging broadly on the back of unexpectedly robust ISM manufacturing data. This development signifies a significant turnaround for the sector, which has shifted back into expansion mode after 16 months of contraction. Moreover, the prices component of the report has skyrocketed to its highest level since mid-2022. This resurgence raises the question of whether the greenback can maintain its newfound momentum, especially with the upcoming scrutiny from the ISM Services and Non-Farm Payroll data later in the week.

During the day, the New Zealand Dollar emerged as the weakest performer, followed by the Euro and the Sterling. On the other hand, the Canadian Dollar positioned itself as the second strongest performer, albeit significantly trailing behind the surging greenback, with the Yen not far behind. The Aussie and Swiss Franc occupied the middle ground.

Looking forward to the Asian session, two crucial developments are on the horizon. Firstly, with the Yen edging closer to the 152 handle against the Dollar once again, market participants are on high alert for potential verbal (or actual) intervention from Japan. Secondly, the Australian Dollar is poised for scrutiny as traders digest the Reserve Bank of Australia’s minutes, seeking clarity on the central bank’s position of “not ruling anything in or out.”

From a technical perspective, the decline in NZD/USD has resumed today, hitting as low as 0.5949 thus far. The near-term outlook will remain bearish as long as the 0.6037 support turned resistance level holds. The next target is the 100% projection from 0.63368 to 0.6037 starting from 0.6215, with a decisive break indicating a strengthening case for the entire decline from 0.6537 (2023 high) to resume through the 0.5771 low.

US ISM Manufacturing Data Shows Positive Growth

The US ISM Manufacturing Purchasing Managers’ Index (PMI) increased from 47.8 to 50.3 in March, surpassing expectations of 48.5. This marks the sector’s return to expansion for the first time since September 2022.

In specific details, new orders rose from 49.2 to 51.4, production surged from 48.4 to 54.6, employment increased from 45.9 to 47.4, and prices climbed from 52.5 to 55.8, reaching the highest level since July 2022.

According to ISM, the relationship between the Manufacturing PMI and the overall economy suggests that the March reading of 50.3% corresponds to a 2.2% change in real gross domestic product (GDP) on an annualized basis.

Japan’s Tankan Survey: Service Sector Optimism at Record High

Japan’s Q1 Tankan survey reveals mixed economic sentiment among large businesses in the country. The service sector has expressed its highest levels of optimism in over three decades, contrasting with a slight decline in confidence among manufacturers.

While the large manufacturing index decreased from 13 to 11, it still exceeded expectations of 10. The outlook for large manufacturing firms saw a modest increase from 8 to 10, slightly below the forecasted 11.

On a positive note, the non-manufacturing index rose from 32 to 34, surpassing expectations of 31 and marking the highest level since 1991. However, the non-manufacturing outlook remained steady at 27, falling short of the anticipated 30.

Additionally, the large all-industry Capital Expenditure (Capex) gauge, which measures capital expenditure plans across industries, is expected to grow by 4% in the new fiscal year, although this figure is significantly below the anticipated 9.2% growth.

Japan’s PMI Manufacturing Shows Signs of Improvement

Japan’s PMI Manufacturing was finalized at 48.2 in March, up from February’s 47.2, marking the highest level in four months.

Despite the sector’s continued subdued performance, there are emerging signs indicating that the worst of the weakness has passed, with softer reductions observed in both output and new orders inflows.

However, it’s crucial to note that the average PMI reading for Q1 stood at 47.8, signaling the weakest quarterly performance since Q3 2020.

Inflationary pressures have remained significant, with input price inflation moderating to its weakest level in over three years. In response to these pressures, selling price inflation has intensified to a three-month high, reflecting manufacturers’ efforts to protect profit margins by passing on higher expenses to customers.

China’s Manufacturing Sector Shows Growth

China’s official NBS PMI Manufacturing rose from 49.1 to 50.8 in March, surpassing expectations of 50.1. This upturn not only marks the sector’s first expansion in six months but also represents its highest reading in a year.

Key details indicate notable increases in manufacturing production, which surged from 49.8 to 52.2, and new orders, which rose from 49.0 to 53.0. Additionally, new export orders increased from 46.3 to 51.3.

PMI Non-Manufacturing also exhibited positive momentum, climbing from 51.4 to 53.0, slightly above the anticipated figure of 51.3. The PMI Composite index, encompassing both manufacturing and non-manufacturing activities, improved from 50.9 to 52.7.

The surge in March was attributed to increased production resumption efforts following the Lunar New Year holiday, coupled with an improvement in market vitality.

China’s Caixin PMI Manufacturing Shows Improvement

China’s Caixin PMI Manufacturing rose from 50.9 to 51.1 in March, exceeding expectations of 51.0 and marking the highest level in 13 months.

There was noted acceleration in both supply and demand within the sector, with overseas demand picking up. However, employment continued to contract, and the depressed price levels worsened.

GBP/USD Mid-Day Analysis

In the GBP/USD market, the fall from 1.2892 has resumed by breaking the 1.2574 support level. The intraday bias is now on the downside towards the 1.2517 structural support initially. A decisive break at that level would suggest that the rise from 1.2036 might have already completed at 1.2892, turning the near-term outlook bearish. Currently, the risk remains tilted to the downside as long as the 1.2667 resistance holds in case of a recovery.

In a broader context, price actions from the medium-term top at 1.3141 are viewed as a corrective pattern to the uptrend from 1.0351 (2022 low). The rise from 1.2036 is considered the second leg, which may still be in progress. However, any upside potential should be capped by 1.3141 to initiate the third leg of the pattern. Conversely, a break of the 1.2517 support level would suggest that the third leg has already commenced targeting the 38.2% retracement of 1.0351 (2022 low) to 1.3141 at 1.2075 once again.

Economic Indicators Update