02.09.202611:18 Forex Analysis & Reviews: EUR/USD: ISM Manufacturing and JOLTS raise fresh doubts about the dollar

"Delayed-action releases" is perhaps the best way to describe the US macroeconomic data published yesterday. The reference is to the ISM Manufacturing Index and the JOLTS report. Despite the red print in the headline numbers, the dollar held its ground, and EUR/USD sellers continued to press support at 1.1580, which corresponds to the middle Bollinger Band on D1 and, at the same time, on W1. The greenback was supported by events in the Middle East, which are once again developing along an escalation scenario.

Even so, yesterday's US data should clearly not be ignored. Both reports matter not only in themselves, so to speak in a vacuum, but also in the broader context of assessing the resilience of the US economy and the future path of Federal Reserve monetary policy. In particular, ISM offers a timely read on the state of the manufacturing sector and, most importantly, on demand and employment within that sector. JOLTS, in turn, provides a more detailed picture of labor market conditions, one of the Fed's key guideposts.

In both cases, the internal structure of yesterday's releases looks materially weaker than it may seem at first glance.

Let us start with ISM Manufacturing. Formally, the August report cannot be described as disastrous: the index remained in expansion territory at 54.6 after rising to 55.6 in July. The indicator has stayed above the key 50-point threshold for an eighth consecutive month. But the main warning signals are embedded in the dynamics of the release's key components. For example, the new orders subindex, which is de facto a barometer of future demand, fell by 3 points to 52.7. That is the indicator's lowest reading in the past three months. At the same time, the backlog orders subindex also declined by 3 points to 51.8. In other words, manufacturing is still expanding, but its margin of safety is gradually narrowing.

A similar picture is visible in production. The corresponding component was largely unchanged at 58.3 after 58.5 in July. Again, at first glance, that looks positive. But manufacturers' own sentiment deteriorated at the same time: the ratio of positive to negative comments on the production component fell to 2.2 from 3.3 a month earlier. Also notable is the combination of slowing demand with persistent price pressure, as the prices subindex remained at a very elevated 71.1, with no improvement from July.

In other words, the structure of the report is beginning to show certain stagflationary traits: economic activity is gradually losing momentum while inflation pressure remains elevated. That is a very inconvenient combination for the Fed, because it simultaneously limits room for policy easing and increases the risk of a further cooling of the economy.

In the current circumstances, however, the employment component may be the most important for the dollar. That indicator fell from 52.8 to 51.2 points, while the ratio of comments about hiring versus staff reductions deteriorated to 1.3 from 1.5 a month earlier. In other words, the manufacturing sector is still creating jobs, but it is doing so less actively.

That ties directly into the JOLTS data published at the same time.

Here the picture was highly mixed and, in my view, clearly negative for the greenback. On the one hand, job openings rose by 89,000 in July to 7.271 million. But the previous month's result, June, was revised lower by a substantial 177,000 to 7.182 million. In addition, other components are also printed in red. New hires, for example, fell by 278,000 to 5.054 million, while the hiring rate slipped to 3.2% from 3.4%. The largest decline was in professional and business services.

The decline in layoffs, from 1.785 million in June to 1.666 million in July, looks positive at first glance. But there is also a nuance here. Historically, the relatively low level of layoffs has supported the overall resilience of US employment. Now, however, companies are not rushing to dismiss workers, but they are also becoming increasingly reluctant to hire new ones. In other words, the labor market has entered a kind of equilibrium. It is the classic low-hire, low-fire scenario, which points more to stagnation than to acceleration in the labor market.

As a result, both of yesterday's releases are de facto unfavorable for the greenback. And while the US economy is not collapsing, the new signs of weaker demand, softer manufacturing activity, and slower hiring are gradually shifting the balance of risks toward a more dovish Fed stance. If subsequent data, above all ADP and NFP, confirm that trend, yesterday's warning signs could evolve into a full-fledged bearish signal for the dollar.

Even so, despite all of these messages, EUR/USD is gradually edging lower. The main driver here is geopolitics: another exchange of strikes between the US and Iran triggered a fresh wave of risk aversion in FX markets and simultaneously pushed oil prices higher. Brent crude climbed to $94–95 per barrel, reinforcing fears of a new inflation spike. The safe-haven dollar emerged as the beneficiary of that situation.

However, as we have repeatedly seen, the geopolitical factor is highly unreliable and changeable. Today it is offering the greenback substantial support, and tomorrow it may almost disappear from the market equation. As soon as the winds of diplomacy begin to blow, the dollar will once again be left face to face with macroeconomic data. And for now, that data is clearly not on its side.

Therefore, for now, the most prudent approach in EUR/USD is to remain on the sidelines, especially against the backdrop of an uncertain break of support at 1.1580 followed by a pullback, the middle Bollinger Band on both D1 and W1. The pair's next move will depend heavily on which of the two factors proves stronger: geopolitics or weak US macroeconomic data.