09.07.202600:39 Forex-elemzések és áttekintések: EUR/USD. What Does the June ISM Services Index Indicate?

The geopolitical agenda has once again taken center stage. A new surge of tension in the Middle East and Trump's resonant statements that the ceasefire with Iran has effectively ended have prompted market participants to seek refuge in safe-haven assets once again. However, betting solely on the geopolitical factor is still premature. If the conflict does not escalate into full-scale hostilities (which is quite likely), the market's focus will shift back to macroeconomic data and expectations regarding the Federal Reserve's future actions in the coming days.

In this context, the ISM Services PMI released yesterday in the U.S. is particularly significant, as it was the first comprehensive indicator of the state of the largest sector of the U.S. economy following the weak June Nonfarm Payrolls report. Its results reinforced market doubts about whether the Fed will indeed resort to tightening monetary policy in the second half of the year.

Although the ISM Services Index formally remained in expansion territory in June, that is, above the key 50-point mark (at 54.0), the content of the report turned out to be far from as strong as it might have seemed at first glance. A detailed analysis of the report's components indicates a gradual loss of momentum in the largest sector of the U.S. economy. This trend heightens concerns about the slowdown in U.S. economic growth in the second half of the year.

The most alarming element of the report was the further slowdown in business activity. The corresponding sub-index fell from 57.7 to 55.4 points. Even though the indicator remains above the 50-point threshold, such a noticeable decline (by 2.3 points) indicates weakening current demand and more cautious behavior among companies. The volume of services provided and operational revenue continues to grow, but the pace of this growth is noticeably slowing. This is an important signal, as the Business Activity sub-index is traditionally considered one of the most reliable indicators of the current state of the U.S. economy.

A significant concern from the report was the slowdown in new orders growth. The corresponding index fell to 55.1, down from the previous value of 56.4. Again, while the indicator remains in the growth zone, the noticeable drop (by 2.3 points) indicates a gradual cooling of demand after a spike driven by geopolitical events and a temporary increase in business activity. For the market, this means that the services sector is no longer demonstrating the same robust expansion as it did a few months ago. Moreover, the dynamics of new orders are considered a leading indicator: if the flow of new clients begins to decline, it will inevitably impact the volumes of services provided, company revenues, and overall business activity.

Another weak point in the report was the sharp reduction in inventories. The sub-index plummeted by 11 points—from 62.5 to 51.2. Such a significant decline reflects companies' caution regarding future demand: businesses prefer not to accumulate stocks, fearing a slowdown in economic activity. This behavior is typically characteristic of late stages in the economic cycle when enterprises begin to manage working capital more conservatively.

The only sub-index that saw a significant increase, preventing the "headline" figure from dropping further, was the employment index, which surged by 3.3 points to 51.2. This indicator returned to the growth zone for the first time in four months. However, this component does not yet appear to convincingly support a speeding up of the U.S. economy; it merely compensates for the three previous months of employment declines and does not yet form a stable upward trend. Furthermore, last week's published June NFP data indicate a gradual loss of stability in the labor market overall, including in the services sector (particularly, the leisure and hospitality sector lost 61,000 jobs, making it one of the main underperformers in the report). It is also worth noting that if the inflow of new orders continues to slow, it will become increasingly difficult for companies to maintain existing staffing levels. This, in turn, may lead to reduced labor productivity and increased pressure on business profitability.

Finally, the dynamics of the price component should be highlighted: the prices paid index dropped from 71.3 to 67.7, marking the lowest level since February of this year. This figure is particularly important for the market, as it indicates a gradual easing of price pressures in the services sector—a segment of the economy that the Fed has been paying increased attention to when assessing inflation risks.

Another notable trend is the "narrowing front" of ISM Services growth. In May, growth was recorded almost across the board, but in June, the number of expanding industries decreased to 14, while the number of sectors in contraction increased to four (up from just one in May).

Overall, the June ISM report suggests a gradual cooling of the economy rather than sustained robust growth. Almost all key components characterizing the current state of the services sector have deteriorated compared to May, although they formally remain in the expansion zone. This indicates that the largest sector of the American economy is gradually losing its growth momentum. Consequently, the Fed is provided with additional grounds for a more cautious approach to future decisions, despite the ongoing inflationary pressures.

Today, the main driver for EUR/USD dynamics remains geopolitics. The rising tension between the U.S. and Iran supports demand for the dollar as a safe-haven asset, overshadowing macroeconomic signals from the U.S. However, if Washington and Tehran resume negotiations, the market will refocus on the prospects for the Fed's monetary policy. In this case, the contradictory June ISM Services report will become one of the arguments for further easing of "hawkish" expectations. For now, considering the ongoing uncertainty surrounding further actions from both the U.S. and Iran, a wait-and-see position regarding the EUR/USD pair appears to be the most justified.