The ISM Non-Manufacturing Composite is anticipated to have remained above the 50 Boom/Bust level for a second month at 51.0 but down from last month’s reading of 52.0. The gauge has improved the last three months as business activity-the most critical component- has remained in expansion territory. 12 industries reported growth in April led by Arts & Entertainment which should continue to improve with the bulk of the fiscal stimulus package reaching consumers in May. However, some the sectors which had been leaders the previous month like warehousing and transportation fell. The sector is generally a leading indicator for future business activity. Additionally, April saw new orders tick lower to 50.1 from 50.2 and new export orders fall into contraction at 48.5 from 55.0 the month prior. The lack of future activity may set up May’s report for a disappointing result. The economy has seen improvement in manufacturing with the Chicago PMI and the ISM manufacturing report both printing better than expected which may translate into a better than expected service industry report. Traders will be watching the release closely as it is preceding the critical NFP reports. However, be aware that the ADP employment report will cross the wires beforehand and may provide event risk as well.

The U.S. economy has started to show signs of life with an improvement in new home sales, manufacturing, consecutive months of better than expected results in durable goods orders and 1Q GDP being revised up to 0.9% from 0.6%. An improvement in services would continue the dollar bullish story and may raise optimism for the upcoming NFP reports. Therefore, we would look for stronger expansion (a reading over 52) and a continuation of recent improvements in business activity and employment to trigger a long position. With a strong fundamental mix, we will look for red, five minute candle close for a short on two lots of EURUSD. Our initial stop will be set above the nearby swing high (or reasonable distance) and the first target will equal this risk. The second objective will be discretionary; and to protect against losses, we will move the second stop to break even when the first target is hit.

The hawkish comments from ECB officials today and renewed credit crisis fears on the back of the S&P credit rating downgrades of Lehman, Morgan Stanley and Merrill Lynch may only require a disappointing service result to generate dollar bearish momentum. We will look for a resumed contraction in services with particular focus on a decline in the employment component for a EURUSD long and will follow the same strategy as a short, just in reverse.

Antonio Sousa is a Currency Analyst for FXCM.