The US Dollar (USD) is weakening on Tuesday, with the US Dollar Index (DXY) trading down 0.2% at the time of writing, as investors position themselves ahead of the much-anticipated release of the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers Index (PMI), scheduled for Wednesday at 14:00 GMT.

Traders remain cautious, as a better-than-expected figure could revive expectations of a pause in the Federal Reserve’s (Fed) monetary easing, while further weakness in the manufacturing sector would reinforce bets on additional interest rate cuts by the end of the year.

Manufacturing sector still under pressure

The ISM Manufacturing PMI is expected to reach 49.0 in September, after 48.7 in August, which would still signal a contraction in business activity, but at a slightly less pronounced pace.

The macroeconomic context remains delicate for the US industry. In August, the ISM Manufacturing PMI index rose to 48.7, from 48.0 in July, but missed the consensus of 49.0.

This marked the sixth consecutive month of contraction in manufacturing activity, despite an encouraging rebound in the New Orders Index to 51.4 from 47.1. Production Index, on the other hand, slowed sharply to 47.8 from 51.4, as did Employment, still in contraction territory at 43.8.

Susan Spence, Chair of the Institute for Supply Management's Survey Committee, noted in the August report: "In August, US manufacturing activity declined at a slightly slower pace, but the contraction in production almost offset the recovery in orders. The increase in the Manufacturing PMI therefore remains limited."

The report also points out that "69 percent of the sector's gross domestic product (GDP) contracted in August, down from 79 percent in July", a statistic indicative of the sector's continuing fragility.

Tariffs and input inflation in the background

Aside from cyclical dynamics, the manufacturing sector is heavily penalized by trade instability. Many ISM survey respondents blamed tariffs imposed on imports, which weigh on costs and disrupt supply chains.

"Tariffs continue to create planning chaos", explained one electronics manufacturer, according to the ISM report. In the transportation sector, one executive even spoke of an environment "far worse than the Great Recession of 2008-09", blaming the contraction in demand directly on US tariff policy.

Meanwhile, the ISM Prices Paid Index stood at 63.7 in August, down slightly from 65.3 but still high. This marks the eleventh consecutive month of rising raw material prices, under the combined effects of higher steel and aluminum prices and tariffs. This persistent inflation in production costs could complicate the Federal Reserve's task of balancing economic slowdown and price control.

Technical analysis of DXY: Bearish pressure is building up

US Dollar Index 4-hour chart. Source: FXStreet.

Bearish pressure is building on the DXY, with the index attempting to break its recent support line at 97.80, visible on the 4-hour chart.

Confirmation of the break could trigger a bearish acceleration, with potential targets around the 100-period Simple Moving Average (SMA) on the 4-hour chart at 97.59. Further down, DXY could then reach the bottom of the downtrend channel at 96.90.

On the upside, a return above the trend line could trigger a rebound and a test of the upper limit of the short-term downtrend channel at 98.13. A break above this remains necessary before a more solid bullish reversal and a retest of Thursday's peak at 98.60 can be envisaged.