Purchasing Manager Index (PMIs) and EURUSD

The publication of the Purchasing Manager Index (PMI) is always one of the most awaited moments on a forex trader’s agenda. These indicators are important because they are able to anticipate the economic cycle. In fact, they are defined in financial jargon as ‘anticipatory indicators’. There are 3 PMI indicators: one concerns the manufacturing sector, another the service sector and the third is a mixed indicator.

The PMIs published by the British agency IHS Markit on a monthly basis measure the economic expectations of future-oriented purchasing managers and are ordered on a scale where the value 50 is the watershed between the area of expansion (above 50) and contraction (below 50). A trader should use the following rule of the thumb when trading with PMIs: every time an PMI indicator increases against the past value and/or is above the value expected by traders, this should be taken as a bullish signal, which strengthens the currency of the economy to which the PMI refers; every time it decreases against the past value and/or is below the expected value, this should be taken as a bearish signal, which weakens the currency. For example, when the eurozone manufacturing PMI improves, this should be seen as a bullish signal for the euro against the dollar. The same applies to PMIs in the main eurozone countries, particularly Germany and France.

For the US, the manifacturing index survey is published by the Institute of Supply Management (ISM). The reasoning applying to the euro area’s PMIs holds also for those of the US. When they are positive and/or better-than-expected this should be seen as a bullish signal for the dollar and vice versa.

To give a concrete example, the euro-dollar rose over 1.13 on 23 June, despite the fact that, the day before, ECB Vice-President Luis de Guindos predicted an unprecedented fall in European GDP of -13.0%. The increase in the EURUSD cross was due to the fact that, in June, the preliminary PMIs of the main EU economies showed an improvement above expectations, especially for the manufacturing and services indicis (up to 46.9 and 47.3 respectively, while expectations were for a smaller rebound to 44.5 and 41.0). This helped the euro to strenghten against the dollar.

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