The US ISM Services PMI increased to 52.4 in October, up from last month’s 50.0 and exceeding predictions of 50.8. The Prices Paid Index rose slightly to 70.0, the Employment Index improved to 48.2, and the New Orders Index increased to 56.2. After the PMI announcement, the US Dollar gained strength, with the US Dollar Index reaching highs of 100.30-100.40. The Dollar performed best against the Japanese Yen among major currencies.

Services Sector Outlook

The ISM Services PMI will be released at 15:00 GMT, expected to show modest growth in the services sector. Due to recent disruptions in US economic data from a government shutdown, this report could impact the value of the US Dollar. An ISM Services PMI above 50 is likely to strengthen the US Dollar, which could influence the EUR/USD exchange rate. The Federal Reserve’s decisions, including possible rate cuts, are also important for market responses. A country’s GDP growth can make its currency more appealing for foreign investment, while a falling GDP may lead to currency decline and impact commodity prices, such as Gold. The October ISM services report is stronger than expected, indicating that the US economy is performing better than anticipated. The significant rise in new orders prompts us to reconsider ideas of an upcoming slowdown. We may need to rethink strategies that assume the Federal Reserve will definitely adopt a dovish approach. The inflation aspect of the report is concerning, with the Prices Paid Index at 70.0. This matches the recent Consumer Price Index (CPI) data, showing core inflation significantly above the Fed’s target, with September 2025 at 3.8%. Ongoing price pressures in the large services sector make it challenging for the Fed to consider lowering interest rates.

Repercussions in Financial Markets

Following this report, market expectations for a December rate cut have significantly dropped. Probabilities on the CME FedWatch Tool fell from about 67% to under 40%. This sharp decline reflects the recurring “higher-for-longer” interest rate environment we saw in 2023 and 2024. For currency traders, this supports a bullish outlook for the US Dollar. We should consider buying call options on the US Dollar Index (DXY) or on pairs like USD/JPY, as the Bank of Japan continues its loose policy. This difference in central bank strategies opens the door for ongoing dollar strength. In interest rate markets, this data suggests yields will stay high. Strategies that benefit from the market pricing out rate cuts, such as selling SOFR futures contracts with near-term expirations, could be advantageous. The mixed signals of strong growth coupled with a declining employment rate may lead to a flatter yield curve. This report brings an added layer of uncertainty, potentially increasing volatility in the coming weeks. The combination of stubborn inflation and a robust economy, alongside a weak job market, creates a complex situation. We can utilize options strategies like straddles on equity indices to take advantage of possible sharp movements, as the market assesses whether this strong data is ultimately good or bad for risk assets. Create your live VT Markets account and start trading now.

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