The Power of PMI (Purchasing Managers Index) in FOREX 📊
💯 The only pure Fundamental Forex Coach in South Africa & Author of “The Ultimate Depression”.
As a pure fundamental trader, I use more fact based economic data and Zero technical analysis. Most traders only consider technical analysis, but what I understand is, if an economy is doing bad, like South Africa, the currency will not do well overall.
Due to my nature, I normally look at PMI manufacturing data closely as it gives a clear indication of the respective economy’s behavior, which has a direct correlation to its currency. Although it is not important news on various FX calendars, I do watch it closely. There are numerous PMI calculations for different sectors (which is important to me ) for example PMI manufacturing, PMI service, PMI construction etc. The calculation take’s in account the health of a specific sector and most of these sectors are highly labour intensive. Furthermore, anything below 50 points (based on the calculation) means that the specific sector is contracting. Anything above 50 means that the sector is expanding. It’s just common sense, that if the sector expands for whatever reason, it will add more jobs, if not, it will decrease the workforce.
In addition the PMI calculation are used globally and it help tremendously to notice a struggling or expansionary economy. As per chart below, PMI business confidence (manufacture PMI) has strong relations with the GDP and unemployment. The first indicator for an economy contraction or expansion is PMI. The moment PMI contracts consistently, it is a clear indication that businesses are not doing well for whatever reason and you will see the side effects on GDP and Unemployment. In relation to the currency, the currency will move in the direction of the PMI. If PMI indicator contract or expand aggressively it will behave in direction of the PMI. Moreover, the PMI implies the foundation of employment, which lead to more spending, inflation, later healthy interest rate hikes and vice versa.
Figure on the left is the USA GDP (in yellow), USA PMI (in blue) and USA unemployment rate (in black). When PMI and GDP grows unemployment decreases. The opposite occur, when PMI and GDP contracts, then unemployment increases.
The same applies to Germany as illustrated in the Figure on the right. Germany’s GDP (in blue), PMI (in yellow) and unemployment rate (in black) are currently the strongest and largest economic powerhouse in Europe. PMI data is currently below 50 points and the first quarter GDP was on 0% growth. As for my study, PMI was the first indicator to illustrate that tough economic conditions are upon Germany and if PMI continues with a downward trend, unemployment will start to rise and it will be a knock on effect.
The Power of PMI economic data should be on your priority list to examine a boom and bust in a economy. Although forex calendars don’t pay attention to this specific indicator it does not mean you must totally ignore it.
The Fundamentalist Coach