Several major economies report flash PMI figures on Friday, but the focus is likely to be on Europe, with the pound and Euro potentially moving substantially in response. Overall, global PMIs are crucial for the market because they are ‘advance’ data for the month and can forewarn traders about trends in the economy and in inflation. The survey is still being conducted, and Friday’s data could be the first insight into reactions to the restart of the war in the Middle East.
As global central banks face similar inflation pressures from higher energy prices, the impact on forex will likely be mediated through the economic growth outlook. In that case, PMI’s are crucial as they indicate nascent economic trends that could drive currency pairs. If economies are not growing enough, it will be hard for central banks to raise rates to control inflation. This is one of the bets behind recurring weakness in the yen, for example. Friday’s data could set the tone for currency pairs until new monthly data comes out almost two weeks later.
What the Market is Looking For
First up is Japan, but here the market will have something perhaps a little more important to digest first: June CPI data. Headline inflation in Japan is expected to tick up to 1.7% from 1.5% prior. The more closely tracked “core-core” rate, which excludes energy and food prices, is projected at 2.0%, up from 1.8%. Rising inflation in Japan is crucial for the BOJ to gain credibility about its rhetoric on raising rates. If inflation disappoints, markets will expect a lower chance of a rate hike, which could further weaken the currency.
The narrative could be compounded if PMI disappoint. The consensus among analysts is for the composite Flash June Japan PMI to remain unchanged at 52.8, which would keep it solidly in expansion. Japanese manufacturing is expected to continue to outperform services despite higher prices. If there is an unexpected drop in this reading, it could weaken the yen; but a substantial beat could support the currency.
Questions about Eurozone Growth
Next up is the German Flash July Manufacturing PMI, which is expected to rise to 50.5 from 50.3, advancing into expansion. This is expected to fit into a pattern where manufacturing has outperformed the services sector in the Eurozone lately. If that’s the case, it could keep the ECB on its hiking trajectory, but might not convince traders, who could weaken the Euro. The composite Eurozone PMI is projected to advance to 50.5 from 50.0 previously, consolidating gains in expansion territory.
The UK composite PMI is also projected to rise, but stay in contraction at 49.7, up from 49.3 previously. This is expected to be weighed down by contracting services compared to expanding manufacturing. Prior to the release, June UK retail sales will be in focus, projected to turn negative at -0.3% compared to the extraordinarily strong 1.2% in May. However, that might be due to frontloading by consumers amid the uncertainty.
US Growth, Currency Reaction
Finally, US Flash Composite PMI is projected to rise to 52.3 from 51.9, consolidating in expansion territory and supported by growth in both services and manufacturing. However, given the focus on the Fed outlook, a miss here could shake markets, which have been shown to be skittish about US data. This could weigh on the greenback, with a higher risk of a decline than an increase, as the market has already priced in dollar strength.
Traders will be looking for a discrepancy in the PMI figures, not just whether they beat or miss expectations. If there is a disconnect in the trends, underperformance in the economy could weigh on that particular currency compared to others. PMI figures are often a key point of realignment in forex markets.
![Credit Card 160×600 [EN]](https://assets.iorbex.com/blog/wp-content/uploads/2023/06/13144507/Blog-Banner_EN-Banner_160X600X2.webp)
