ISM Manufacturing PMI set to show modest uptick in US factory activity in January

• The US ISM Manufacturing PMI  is seen improving modestly in January.
• Markets will also look at the ISM Prices index and the Employment index. 
• EUR/USD remains under pressure around the 1.0400 zone. 

Excitement is building as the Institute for Supply Management (ISM) prepares to release the January US Manufacturing Purchasing Managers' Index (PMI) this Monday. This report is a key barometer of the health of the United States (US) manufacturing sector and offers valuable insights into the broader economy's direction.

Here's what to watch for:

PMI Thresholds: A PMI above 50.0 signals that the manufacturing sector is expanding, while a reading below 50.0 indicates contraction.

Expectations: Analysts are anticipating a PMI of 49.5 for January. This is a slight improvement from December's 49.3, suggesting a modest easing in contraction but still below the critical 50.0 mark.

Despite the slight uptick, the January PMI is expected to remain in contraction territory. However, it's important to note that the overall economy has been on an expansion path for an impressive 56 months, with only a brief dip in April 2020 during the height of the pandemic.

What to expect from the ISM manufacturing PMI report?

In December, the manufacturing sector showed promising signs of growth for the second month in a row, thanks to an improvement in the ISM Manufacturing PMI.

The ISM Manufacturing PMI has several key components. First, the New Orders Index kept expanding for the second consecutive month, indicating that manufacturers are receiving more orders. In December, the Production Index bounced back into expansion territory after six months of contraction, signaling that factories ramped up their output. Meanwhile, the Prices Index continued to rise, reflecting ongoing increases in production costs.

One interesting highlight is the Backlog of Orders Index, which climbed to 45.9 percent in December, up 4.1 percentage points from November's 41.8 percent. This rise suggests that manufacturers are facing higher demand and are building up their order queues. On the flip side, the Employment Index dipped by 2.8 percentage points compared to November, indicating a slight slowdown in hiring within the sector.

Generally, a PMI reading above 50 percent means the manufacturing sector is growing, while below 50 percent indicates a contraction. However, even a reading above 42.5 percent over time can signal overall economic expansion.

What does this mean for investors? With the manufacturing sector showing strength, high-yielding assets like stocks might see an upward trend. At the same time, the US Dollar (USD) could face selling pressure as investors grow more confident and take on more risk. Additionally, signs of continued growth--such as rising new orders and easing price pressures--are likely to be welcomed by investors looking for further expansion in the economy.

When will the ISM Manufacturing PMI report be released and how could it affect EUR/USD?

The ISM Manufacturing PMI report is scheduled for release at 15:00 GMT on Monday. Ahead of the data release, the US Dollar struggled to extend its weekly recovery, while EUR/USD corrected further south after hitting new yearly peaks around 1.0530 last week. 

Pablo Piovano, Senior Analyst at FXStreet, notes: "The continuation of the downward trend should put EUR/USD en route to revisit its 2025 low of 1.0176 established on January 13. The breakdown of this level could signal a bearish turn back to the crucial parity zone."

"On the flip side, the pair faces a minor resistance at the 2025 high of 1.0532 recorded on January 27. Should it break through this barrier, traders might see a spirited climb toward the December 2024 peak of 1.0629 (set on December 6) once the Fibonacci retracement of the September-January decline at 1.0572 is cleared."

Piovano adds: "The ongoing negative outlook is expected to persist as long as spot trades below its critical 200-day SMA at 1.0765. Further indicators note that the Relative Strength Index (RSI) has eased below 46, indicating some loss of momentum, while the Average Directional Index (ADX) approaching 22 denotes a weakening trend."