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Continued US manufacturing expansion supports the US dollar

There was a lot to take in today as the week moves deeper into the central bank rate decisions and other Tier-1 data points before finally arriving at Friday NFP. Today the US dollar stopped its rapid decline on the back of good news and we could be setting up for a retest of the recent swing highs.

Market Wrap

According to the Institute for Supply Management (ISM), the manufacturing sector activity in the United States grew in January 2022, but at a slower rate than December 2021. Despite the decline in January, the Manufacturing PMI for ISM was 57.6%, maintaining its expansionary position for the 20th consecutive month.

"The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment, but January was the third straight month with indications of improvements in labour resources and supplier delivery performance. Still, there were shortages of critical intermediate materials, difficulties in transporting products and lack of direct labour on factory floors due to the COVID-19 omicron variant," ISM Manufacturing Business Survey Committee Chair Timothy Fiore noted.

With regards to the supplier delivery performance, I have been watching the decline in the Baltic Dry Index which is a benchmark for the price of moving major raw materials by sea. Obviously whilst there were massive COVID disruptions the ships available for moving things around were few and far between and the cost rose as demand outstripped supply. Containers left empty at ports or not unladed from ships meant that freight disruptions kept the supply chains from getting back to normal. The Baltic Dry Index is now back at pre-pandemic levels so inventories should be arriving on time to suppliers. With regards to the employment index, this is steadily rising and is in expansionary times, so we should get better ISM PMI’s in the future too.

Canadian GDP came in better than expected but below the previous reading of 0.8%. At 0.6% for November there is little to cheer other than it marks the 6th consecutive month of expansion, and that Canada is not in a recession. Looking at the alternative media, there is a potential supply chain shock coming as many truckers have descended on the capital city in protest of vaccination mandates. Next month’s GDP figure may not be reported for a while but there could be negative readings coming.

The forex heatmap has gone some way to reversing some of the risk-off sentiment from the London session. The Aussie and Kiwi have had positive flows and the yen and Swiss franc are less in favour. The US dollar has remained the dog of the forex all day.

In this morning’s video, I described what I wanted to see in terms of price action at certain levels on the US dollar index chart. I am happy to say my base case scenario worked out almost perfectly, though there is still plenty of data to come this week which could unravel my good fortune. $96.25 was the first level of support I wanted to say hold. Should we get through that line then the small balance area around $95.60 would be the next area I want to see reject sellers and attract buyers? Otherwise, I’ll start looking for rips to sell.

In the UK PM Johnson seems to be dodging the calls to resign though whether the citizens forgive him and the Conservatives at the next election would be very doubtful. The pound has though been able to build on yesterday’s strength and is edging its way back above the 1.3500.

The better-than-expected final reading in the UK Markit/CIPS manufacturing PMI for January certainly helped this morning, but the weaker greenback these last few days have pushed the pound higher. This week traders learn whether the Bank of England is going to push on with their rate hike cycle and for now there seems little reason why they shouldn’t.

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