USD Surges On Manufacturing Beat

The US dollar exploded higher yesterday in response to yet another domestic beat. The latest ISM Manufacturing PMI showed that the US manufacturing sector posted its first expansion in six months over last month.

Manufacturing Well Above Expectations

Jumping to 50.9 in January from four-year lows of 47.8 over the last month of 2019, the increase in the manufacturing sector was the biggest monthly gain since 2013. Notably, the gain was also well above the 48.5 figure projected. This meant that the recovery in manufacturing occurred at a far quicker pace than most players were anticipating.

New Orders Jumped

The breakdown of the data was particularly encouraging with the new orders component surging to an eight-month high of 52. Production was also up by just shy of 10%. This is its biggest gain in over six years. The data has been a big boost for US bulls and reflects the level of optimism that kicked in as a result of the US/China trade deal. The deal was signed at the beginning of the month.

US/China Trade Deal Boosts Sentiment

Following tense negotiations last year, the two leading economies were able to finally sign off on the phase-one trade deal first agreed in October 2019. The deal broadly comprises of the US agreeing to reduce and, in some cases, remove tariffs on Chinese goods. China has agreed to greatly increase its purchase of US goods.

The US/China trade war has ravaged global manufacturing over the last two years with manufacturing sectors in the US, UK, and Europe all heavily weakened by the drop in trade. These latest US figures are highly encouraging that the factory sector can start to recover quickly.

Coronavirus Poses Risks

However, while the data is promising, recent developments bare considering. The outbreak of coronavirus over the last few weeks is not accounted for in the data. As the spread of the virus is worsening (with the death toll rising), there is a risk that this could prove to be a temporary rebound in manufacturing activity. Global asset markets have been lower over recent weeks. This comes as a result of rising uncertainty linked to the virus’ spread. Traders will now be eagerly awaiting the next manufacturing data to see if the rebound was able to withstand this uncertainty or if the factory sector has once again fallen into negative territory.

Technical Perspective

The USD index is fighting to hold above the bearish channel broken last week. The retest of the 97.42 level found support, though the move remains shallow for now. If price can hold above here, the focus will turn back to the 98.25 level next as the main upside objective. However, any deeper move lower will put the focus on the 96.37 level support next.