Bullish USD faces Lower PMI Test

Bullish USD faces Lower PMI Test

Update on previous article outlining ideas for the week ahead, published 02/02/2025 which can be found here.

The lower-than-expected S&P Global Manufacturing PMI for February (47.8 vs. 51.7 forecast and 51.6 previous), released today, signals weaker than expected U.S. manufacturing activity, which could impact the bullish USD outlook. Here’s how it could affect your currency analysis and trade ideas:

Impact on USD Pairs

1. USD/JPY (Bullish Trend)
   • Effect: A weaker PMI raises concerns about U.S. economic strength, potentially softening Fed rate hike expectations. If this leads to lower Treasury yields, USD/JPY could face resistance.
   • Adjustment: If U.S. economic data continues to disappoint, USD strength may slow down. However, Japan’s continued ultra-loose monetary policy still favors USD/JPY upside. Watch for price action near 150.00—if it holds, the bullish trend remains valid.
2. USD/CHF (Bullish Trend)
   • Effect: USD/CHF may see some short-term pullback if weaker PMI reduces Fed hawkishness. However, if risk-off sentiment rises due to weak U.S. data, CHF could strengthen as a safe haven, limiting USD gains.
   • Adjustment: Maintain a bullish bias, but be cautious of near-term volatility. A pullback to the breakout trendline could offer a better entry point.
3. GBP/USD (Bearish Trend)
   • Effect: The weaker USD from poor PMI data could slow GBP/USD downside momentum. However, if risk sentiment worsens, the USD may still outperform GBP.
   • Adjustment: Wait for confirmation of the trendline breakout before shorting. A weaker USD could lead to temporary consolidation before a resumed downtrend.
4. EUR/CAD (Bullish Trend)
   • Effect: The impact on EUR/CAD is indirect. If weaker U.S. data pressures oil prices (negatively affecting CAD), EUR/CAD bullish momentum could remain intact.
   • Adjustment: The bullish trade idea remains valid, especially if the Euro gains relative strength.
5. EUR/USD (Neutral to Bearish)
   • Effect: A weaker USD could lead to range-bound trading rather than a clear bearish breakdown.
   • Adjustment: Wait for a confirmed breakdown of key support levels (1.0390-1.0380) before entering short positions. If USD weakens significantly, EUR/USD may trade sideways rather than trending lower.

Impact on USD/CAD Outlook

• A weaker U.S. PMI could reduce bullish momentum for USD/CAD, but the pair remains volatile due to:
  • High implied volatility and risk premiums favoring CAD weakness.
  • Trade concerns and Fed-BoC policy divergence.
• Key Takeaway: The USD/CAD bullish bias remains, but weaker U.S. data increases the risk of short-term pullbacks. Consider tightening stop-loss levels to manage volatility.

Final Thoughts

• The lower PMI weakens USD bullish momentum but does not completely reverse the trend.
• USD/JPY and USD/CHF traders should watch for short-term pullbacks.
• GBP/USD and EUR/USD short trades may require patience—weak USD could slow downside moves.
• EUR/CAD and USD/CAD remain attractive, but volatility is high.