Services Sector Recovers

The US Dollar surged higher yesterday as the latest US economic data provided some welcome relief for USD bulls.

The October US ISM Non-Manufacturing reading came in above expectations reflecting a rebound in the non-manufacturing sector (which is a far larger share of US GDP than manufacturing).

The reading came in at 54.7 last month, up from 52.6 in September and well above the forecast of 53.5. Given the weakness in this indicator over recent months, the results caused a relief rally in USD. The index jumped from low to higher 98s.

Looking at the breakdown of the reading for the service sector, sales, new orders, and employment all rebounded last month following falling to a three year low in September. The data is highly important for USD traders given that the services sector comprises broadly two-thirds of US economic activity.

Fed on Hold

This latest reading has taken on stronger importance in the wake of the October FOMC.

The Fed cut rates by a further .25% as expected. However, Powell highlighted that the bank will now look to hold off on any further adjustments. This will be the case while it monitors the economy as well as external factors (trade war).

Essentially, the Fed is happy to keep rates on hold going forward provided there isn’t another leg lower in data or any collapse in US-China trade talks. With last Friday’s NFP report coming in above expectations and now the services sector rebounding, there is a small bit of positive momentum building.

December Rate Cut Expectations Fall

Pricing for a December rate cut from the Fed has now fallen further. The CME Group FedWatch tool IS showing just a 5% chance of a further cut, down from the 20% reading just after the FOMC.

The big test for USD will come next week when we get the October CPI reading. If CPI can print in line with expectations or register a mild beat, this should keep the near-term USD trend positive.

However, any surprise to the downside could see USD longs unwound just as quickly. Remember, the Fed’s data-dependent stance has two-way risk. If data disappoints between now and the December FOMC meeting, the Fed could quite easily move rates lower again.

Trade Talks Still On Watch

Alongside incoming data, the Fed will be closely watching the US-China trade negotiations.

Recent commentary and headlines suggest that the two sides are on course to sign off on the “phase one” trade deal in the coming months.

If the deal is signed, this will be positive for the US economy and should take further pressure off the Fed.

However, if talks stumble again, USD could again come under pressure.

Technical Perspective

(Click on image to enlarge)

The rally in USD is seeing the index challenging last week’s highs now, ahead of the next key structural resistance at the 98.08 level. This will be an important zone to watch. Any reversal from there could prove to be the right shoulder of a large head and shoulders pattern. This would put focus on a move back below the 97.01 level. However, above there, focus will turn to the 99.05 resistance just ahead of 2019 highs.