The EUR/USD has been drifting lower and leaving behind the 1.32 handle ahead of the US market open.
The highly relevant ISM manufacturing report is due to be released at 10:00 New York time (15:00 London time) and a positive release is expected to give the US dollar
an added boost as it would reaffirm the Federal Reserve's convictions about 'tapering'.
Although the manufacturing sector has lost some weight in the US economy, it continues to be seen as an important gauge of economic activity. As such, the report carries the potential to dent markets despite being often overlooked due to the week's main event, the US Employment Report.
According to analysts at Danske Bank, the ISM manufacturing index is likely to fall back a bit after last month's surge.
"We suspect that the seasonal adjustment added almost two points to the index in July and expect the ISM to give back some of the increase. However, the level should remain high, indicating a continued improvement in the US economy," they said.
The analyst consensus calls for a reading of 54.0 compared to July's 55.4.
Danske Bank added: "The move lower in EUR/USD underlines that the cross is no longer trading on risk appetite but rather on whether or not the Fed will taper at this month's Fed meeting. Today's ISM is expected to confirm these expectations and further USD support could very well be in store."
Update: Markit PMI manufacturing down to 53.1 from 53.9.
Just one hour before the official ISM manufacturing data was slated to be released, the Market PMI manufacturing index for August showed a lower than expected reading of 53.1. The market consensus was looking for a reading closer to 53.9, which would match the prior month's reading. Nonetheless, the reading remained well into expansionary territory (above 50).
Chris Williamson, Chief Economist at Markit said: "The downturn in the headline PMI is a disappointment, suggesting that there is a risk that the goods-producing sector is stalling. However, a more encouraging picture emerges if we look at the details."
"In particular, inflows of new orders - a useful guide to future production - are growing at the fastest rate for seven months. At the same time, inventories of finished goods showed the largest fall since 2009 as some companies reported that demand often exceeded production. Factories will need to ramp up production to replace depleted inventories given this order book growth."
The EUR/USD remained mostly unfazed by the data but dipped to 1.3170. In regards to implications for the ISM manufacturing index, which is considered a more significant indicator, chances are that there will not be a significant surprise to the upside. As long as there is not a huge miss of expectations, this one piece of data will likely not alter the prospects of Fed 'tapering' until the more important jobs report is released.
"However, despite these encouraging signs, the survey is still consistent with only very modest growth of factory output and hiring, suggesting policymakers will remain nervous about the on-going fragility of the economy," Williamson added.