Friday has the release of flash PMI figures from several major economies, which normally move the market. However, a theme that has been developing over the last few months suggests that this time around, the data will have a greater impact on Forex specifically. Currencies are in flux as investors hesitate amid global uncertainty, and PMIs are leading indicators of economic direction.
The US has by far the largest capital markets in the world, but recent geopolitical and market trends have caused investors to move away from American assets. This has contributed to the dollar’s weakness lately. The issue is where this capital moves to. Last year, the uncertainty surrounding the trade wars led many investors to move to Europe, hoping the economy would take off and they’d get better returns.
Why PMIs Matter So Much for Forex Right Now?
Now, traders are looking at the high valuations in US equities and looking for where to store value. Some have opted for gold, but that doesn’t return a dividend. The evolution of key economies could be pivotal in where investors allocate their capital, potentially driving strong swings in currencies.
The purchasing managers index (PMI) is a survey that tracks supply trends each month. The flash reading is a partial set of results for the current month, meaning it’s the freshest insight into the economy that is readily available. For any trader looking to get in ahead of the market move, PMIs can indicate the trend.
Money Flows Direct Forex Moves
Investors are looking to buy into economies that offer better returns, whether that means buying bonds or stocks. To do so, they have to buy that currency, which makes the currency more valuable. Last year, many investors sold dollars to buy Euros, hoping that European stocks would outperform American equities as the EU economy sped up. That contributed to the decline in the dollar and rise in the Euro. However, the EURUSD did not continue to rise, as the US economy ultimately outpaced Europe’s, which became evident in the third quarter.
The reasons for selling dollar assets haven’t gone away, but traders are looking for signs of economic growth that will exceed America’s. That might first be seen in PMI data, which is why Friday’s figures could move the market more subtly over days and weeks after their release.
What to Look Out For
Japan’s new Prime Minister has pledged to increase spending to boost the economy, which could be a target for investors. Particularly given the yen’s appreciation, which could help improve investor returns. However, Japan’s Q4 GDP disappointed, so traders will be keen to see if there are signs of a course correction. Japan’s flash February composite PMI is projected to decline to 52.5 from 53.1 in the prior month.
The Eurozone Economy has improved lately, but hasn’t taken off with the fervour expected. Flash February PMIs are expected to advance slightly into expansion territory at 51.7, up from 51.3 previously. The US is expected to do a little better, with its composite PMI ticking up to 51.9 from 51.8 in January.
