Today, we will bring you another crucial indicator of foreign exchange trading - the Purchasing Manager Index. For foreign exchange investors who trade major currency pairs, including the US dollar, understanding the principles and impact of the Purchasing Manager Index is the only way to earn the first bucket of gold in the market.

What is the Purchasing Manager Index?

The Purchasing Manager Index is an index compiled through monthly surveys of purchasing managers from approximately 400 of the largest factories in the United States, reflecting trends in economic activity. The Purchasing Managers Index is divided into the Manufacturing Purchasing Managers Index (PMI) and the Service Purchasing Managers Index (NMI). Compared to the latter, the former was introduced in the 1990s and is an important indicator for investment banks, funds, and investors to predict future economic trends in the United States. And this article focuses on the Manufacturing Purchasing Managers Index (PMI). The manufacturing procurement manager index released on the first trading day of each month focuses on investigating five major data: new orders, production, employment, logistics, and inventory, each accounting for 20% of the index.

practical application

After understanding the principles behind PMI, you will come to the most important application part. Firstly, the index values range from 0 to 100, with a watershed of 50. Simply put, an index above 50 indicates an overall improvement in the economy, indicating a significant opportunity for GDP to record positive growth in the next 12 to 18 months. On the contrary, an index below 50 indicates a deterioration in the economic environment, or even a precursor to economic recession.

The following editor will use the three-year data of the Manufacturing Purchasing Managers' Index (PMI) and the US dollar index as examples to explain how PMI affects the future trend of the US dollar index.

In 2017, the PMI fell from a one-year high of 55 to 52 levels, and the US dollar index took advantage of the trend and bottomed out. Subsequently, in 2018, the PMI continued to break through the 55 level, indicating stable growth in US manufacturing economic activity, benefiting the gross domestic product and driving the gradual recovery of the US dollar index. However, it is worth noting that even though PMI is one of the leading indicators of the economy and a catalyst for the US dollar's trend, investors should not only focus on a single indicator to avoid misjudging the overall market atmosphere.

What is FOMC?

FOMC, also known as the Federal Open Market Committee, is affiliated with the Federal Reserve Board and determines the direction of US monetary policy. FOMC is mainly composed of a board of directors, consisting of seven members and five Federal Reserve Bank presidents. The President of the New York Federal Reserve Bank serves on the board for a long time, while other US Reserve Bank presidents rotate on the board annually. The Federal Reserve can increase or decrease the money supply through open market operations, adjust discount rates, and set bank reserve requirements. The Board of Directors of the Federal Reserve is responsible for setting discount rates and reserve requirements, while the Federal Open Market Committee is specifically responsible for the operation of the open market, which is the buying and selling process of government securities.

For example, in order to reduce the money supply, the Federal Reserve sells these securities, and the interaction of all Federal Reserve policy mechanisms determines the federal funds rate or the overnight interest rate at which banks lend their balances to other banks under the jurisdiction of the Federal Reserve. On the other hand, the federal funds rate also affects other long-term and short-term interest rates, such as exchange rates, credit supply, investment demand, employment rates, and economic output.

FOMC holds eight regular meetings every year, but they can still meet if needed. These meetings are not publicly available, so they often become a topic of speculation on Wall Street. Analysts always try to speculate that the Federal Reserve will relax or tighten the money supply, leading to an increase or decrease in interest rates. Therefore, as previously mentioned, economic indicators play a significant role in foreign exchange trading, especially targeting specific traders through fundamental analysis, especially during hot news periods.

The FOMC interest rate resolution is one of the most influential indicators of the US dollar. What we can confirm is that after the news is released, the market often experiences volatility. We also understand that volatility is what traders want, and many traders will tell you that trading during the FOMC news release period is like signing a death warrant, which requires great caution. I cannot tell you which method is better, but as I mentioned earlier, during the FOMC news release period, the market was very unstable, and all transactions were mainly speculative.

Possible situations during FOMC news:

Based on the experience of many traders, the following are possible scenarios that may occur during FOMC news:

Firstly, there will be a surge in the market in a specific direction, which many traders who rely on their feelings will naturally follow; Then the surge ended and moved towards change, and those who relied on their feelings also turned the tide. When the market changed again, traders also blindly followed suit. The fluctuations in the market inevitably made those who relied on their feelings feel disgusted and tired. However, this allowed patient and experienced traders to better utilize the larger than average fluctuations, which were undoubtedly based on the effects of speculation and FOMC news releases.

The meeting is not open to the public, but after all, traders are not machines. Do not trade based on your feelings and do not fall into the "herd effect".