US service sector activity increased in February, with the ISM Services PMI rising to 56.1 from 53.8. This was above the forecast of 53.5.
The Prices Paid Index eased to 63 from 66.6. The Employment Index rose to 51.8 from 50.3.
The New Orders Index increased to 58.6 from 53.1. This points to firmer demand within services.
After the release, the US Dollar stayed slightly weaker. The US Dollar Index (DXY) gave back part of earlier gains and moved below 99.00.
We saw strong economic activity in the service sector this time last year, with the ISM Services PMI hitting a robust 56.1 in February 2025. This expansion occurred even as the Prices Paid index showed inflationary pressures were starting to ease. That combination gave the market confidence in a soft landing scenario throughout 2025.
That backdrop of a resilient economy allowed the Federal Reserve to hold interest rates steady for longer than many anticipated last year. Now, however, the CME FedWatch Tool shows the market is pricing in a 68% probability of at least one rate cut by the September 2026 meeting. This signals a clear shift in expectations toward a weaker economic outlook compared to the strength we saw a year ago.
The most recent ISM Services PMI report for February 2026 confirmed this cooling trend, coming in at 52.9. While still in expansionary territory, this is a notable deceleration from the momentum we observed in early 2025. This slowdown, combined with January 2026 core PCE inflation that remains sticky at 2.8%, presents a more challenging picture for the Fed.
For the coming weeks, we should consider strategies that benefit from increasing expectations of rate cuts. Buying call options on interest rate-sensitive instruments, like long-duration Treasury bond ETFs, could provide upside exposure to a dovish policy shift. This approach allows us to position for falling yields if economic data continues to soften from last year’s stronger pace.
We should also look at the US Dollar, which was surprisingly weak following the strong 2025 report. With the US economy now slowing relative to some international peers and rate cuts on the horizon, the case for dollar weakness is more compelling. We can express this view by purchasing put options on the US Dollar Index (DXY) or related currency funds.
Start trading now – Click here to create your real VT Markets account
