Manufacturing Growth Slows but Shows Signs of Stability

Manufacturing growth slowed but showed resilience in February. Key data releases, Fed policy, and market trends impact USD, Euro, Gold, and global trade outlooks.

Manufacturing activity, which saw strong expansion in late 2024, has encountered headwinds in recent months. After registering a sluggish 50.1 in January, the Manufacturing Purchasing Managers’ Index (PMI) rebounded slightly in February to 50.8, surpassing market forecasts of 50.4. The marginal improvement was driven by the fastest increase in output and new orders in three months, coupled with a softer decline in employment. Meanwhile, sentiment within the sector showed signs of optimism despite persistent economic uncertainties.

However, despite this better-than-expected PMI reading, oil prices struggled. West Texas Intermediate (WTI) crude hovered around $70.60 per barrel before dipping below the $70 mark by midday in Asian markets, reflecting broader market caution.

Impact on European and U.S. Trading Sessions

Europe: Manufacturing Woes and Inflationary Trends

The Euro Area’s manufacturing sector has remained in a prolonged downturn for over two and a half years, signaling continued weakness. Additionally, inflation data for February suggests a moderation in both headline and core consumer price indices (CPI), reinforcing expectations of weaker consumer demand. A combination of subdued manufacturing activity and cooling inflation could exert downward pressure on the Euro in the European trading session.

Meanwhile, the United Kingdom’s manufacturing sector, which expanded for most of 2024, has been in contraction since October. Sales have weakened domestically and overseas, while employment levels and backlog of work have declined significantly. If February’s PMI data confirms continued contraction, the British pound could face strong headwinds in the European session.

Manufacturing Growth Slows but Shows Signs of Stability

North America: Canadian Growth Faces U.S. Trade Barriers

In Canada, the manufacturing sector maintained its expansion streak, with December’s PMI hitting 52.2 before easing to 51.6 in January. While growth has slowed, it marks five consecutive months of expansion. However, recent U.S. tariffs on Canadian imports have pressured the Loonie, pushing USD/CAD above 1.4400 last week. This pair is expected to remain supported as the new trading week unfolds.

Dollar Index (DXY) and Key Market Movers

ISM Manufacturing PMI (3:00 PM GMT)

Investors are keenly awaiting the Institute for Supply Management’s (ISM) February Manufacturing PMI report. After nine months of contraction, January saw a return to expansion, driven by stronger new orders and production. A second consecutive month of growth could reinforce confidence in the sector’s resilience and bolster expectations of sustained expansion.

Federal Reserve Policy and Economic Outlook

The Federal Reserve’s Board of Governors recently voted to maintain the Federal Funds Rate at 4.25-4.50% during its January 29 meeting. Policymakers aim to balance inflation and employment objectives, with recent indicators suggesting steady economic activity and a resilient labor market. However, inflation remains slightly elevated, leading to a cautious approach to monetary policy.

December’s Summary of Economic Projections (SEP) indicated a shift in interest rate expectations, with only two rate cuts of 50 basis points forecasted for 2025, a reduction from the previously projected 100 basis points. Growth forecasts for 2024 and 2025 were revised upward, reflecting a more optimistic economic outlook.

The Federal Reserve remains committed to rolling over Treasury securities exceeding a cap of $25 billion per month and reinvesting agency mortgage-backed securities (MBS) above a $35 billion threshold to maintain stability in financial markets. The next policy meeting is scheduled for March 18-19, 2025.

Gold Market Outlook

ISM Manufacturing PMI (3:00 PM GMT)

Gold traders are closely watching today’s ISM Manufacturing PMI release, as a stronger-than-expected reading could bolster the U.S. dollar, potentially weighing on gold prices. If momentum in manufacturing activity continues, the greenback may gain, pressuring the precious metal in the near term.

Next 24 Hours Market Bias

• U.S. Dollar (DXY): Weak Bearish
• Gold (XAU/USD): Weak Bullish

With key data releases on the horizon, market participants will closely monitor PMI readings and central bank signals for further direction in global trading sessions.

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