The US service sector showed little growth in September, with the ISM Services PMI dropping to 50, below the predicted 51.7. The Employment Index slightly increased to 47.2, while the Prices Paid Index rose to 69.4, signaling ongoing inflation. As a result, the US Dollar weakened, with the USD Index falling by 0.2% to 97.67. The dollar was particularly weak against major currencies, especially the British Pound.

Macroeconomic Focus Amid Government Shutdown

Market focus shifted to economic data because the US government shutdown delayed the Nonfarm Payrolls report. The ISM Services PMI forecasted at 51.7 was seen as a sign of growth, but its impact is often less significant when released with other important data. In August, the ISM Services PMI suggested the sector was growing, with the New Orders Index at 56. However, the Employment Index fell to 46.5, indicating difficulties in hiring. The ISM Manufacturing PMI, reported separately, showed some improvement but remained in contraction, revealing ongoing challenges after the pandemic. The Federal Reserve’s monetary policies, including changes to interest rates and quantitative easing, affect the US Dollar’s value. Quantitative tightening usually strengthens the dollar. The Federal Open Market Committee (FOMC) meets eight times a year to make these decisions. Looking back, a PMI of 50 in the US service sector was a warning sign years ago. On October 4, 2025, we saw the September 2025 services PMI at 51.5, indicating modest growth but falling short of expectations for a strong rebound. This implies that the economy is expanding but remains fragile and sensitive to policy changes.

Monetary Policies and Implications for Traders

Inflation was a major concern in earlier reports, with the Prices Paid Index at a high of 69.4. This was part of the inflation surge in the early 2020s, prompting the Federal Reserve’s aggressive tightening. The latest data from September 2025 shows the Prices Paid Index has dropped to 58.0, which is an improvement but still high compared to pre-pandemic levels and the Fed’s comfort zone. Previously, the Employment Index was at 47.2, indicating weakness that made the Fed consider easing. In contrast, the labor market in 2025 is performing better, with the latest employment reading at 50.5, suggesting slight growth. This shift from a weak to a resilient labor market is a main reason for the Fed’s changed approach. The Federal Reserve is no longer cutting rates; after a significant rate hike cycle, the current Fed Funds Rate stands at 3.5%. The market now estimates about a 50% chance of a rate cut by the end of this year, a major shift from the previous easing environment. This makes new data on inflation and growth crucial for predicting the Fed’s next actions. For derivative traders, this mixed climate indicates that implied volatility in interest rate options might rise in the coming weeks. Traders should consider options on SOFR futures to prepare for potential sharp movements if the next inflation report surprises. Strategies that benefit from price fluctuations, regardless of direction, may be wise. This situation also affects currency derivatives, as the US dollar is very sensitive to Fed expectations. Back then, EUR/USD was trading near 1.17, while today it struggles around 1.05, reflecting a stronger dollar due to higher interest rates. Hedging dollar exposure with options on major currency pairs seems prudent until we receive clearer signals about the Fed’s future rate decisions. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now