US Manufacturing Purchasing Index (PMI) and EUR/USD
One of the most popular fundamental analysis tools that
every fundamentalist uses are indices.
Opening any economic calendar, you will see a picture that they are highlighted as strong volatile news, and regardless of the service where you get information in order to conduct a fundamental market analysis, indices are given special attention, describing their importance and impact on the course of the national economy. currencies.
In terms of the degree of their influence on the thinking of traders and investors, indices can be placed in second place after such macroeconomic indicators as GDP, interest rate, and trade balance.
But is this really so? Does the news release on a certain index really have such a strong impact on market participants?
Unfortunately, information about the impact of certain news on the Forex market is often exaggerated, so you should think twice before deciding to open a position. One of these popular indices that is recommended to be used in your trading for currency pairs with the dollar is
US Manufacturing Purchasing Index (PMI). The index is calculated and published by the Institute for Supply Management and is based on a sociological survey conducted among the chief managers of 400 different industrial companies across all US states.
Thus, thanks to this survey, you can see business activity in the manufacturing industry, which is the heart of the economy of any country, and in our case, the heart of the US economy. Data is published on a monthly basis, so you have the opportunity to track the development of the industry as a whole over time.
The use of an index in trading on the Forex market comes down to the fact that a trader compares data for the current period with the previous month, and if the index indicator has increased compared to the last month, this is a signal for the strengthening of the USD, and if there has been a decrease, this is a signal for a deterioration in business activity and USD weakness.
However, according to analysts, a value that exceeds 50 points indicates a significant expansion of business activity in the manufacturing sector, and a value below 50 indicates a strong economic recession, which may be a harbinger of a crisis or a turning point when the economy comes out of the bottom.
Considering the high importance of the indicator for a trader, I propose to look at history at how the market behaves after the publication of the news, evaluate the real impact of the indicator on trading participants and check the profitability of trading on the EUR/USD currency pair due to the popularity of this instrument.
On July 1, 2015, information released on business activity in the manufacturing sector indicated an expansion of business activity, since if last month the value was 52.8, then at the current stage the value was increased to 53.5. Positive information should lead to a strengthening of the dollar, so we should all see a fall in the EUR/USD currency pair. We see the real picture of what happened in the picture below:
The chart shows that market participants did not immediately perceive the positive data, so for the first 45 minutes we can observe the price moving against the news, and with rather large candles, which threw out more than one market participant on the stop order. However, an hour later there was a real reaction to the publication of information and the price gradually passed 38 points within nine hours. The news ended with a final slowdown and entry into a sideways market.
On August 3, 2015, the value of business activity in the manufacturing sector was 52.7, which primarily tells us about the deterioration of business in the manufacturing sector, since last month the figure was 53.5.
The reaction to the indicator should be strong, since in addition to a noticeable deterioration against the background of last month, the data came out worse even for the period before last. Therefore, given such indicators, we can safely assume that the chart of the EUR/USD currency pair will go up. See how the price behaved below:
The image shows that the expected strong reaction simply did not take place, but the price successfully gained 26 points, and we could observe the growth for 1 hour and 10 minutes. At the end of the news effect, you can see a strong drop in the chart of the currency pair, which even exceeded the entry point and probable stop orders.
On September 1, 2015, data released indicated another deterioration in the manufacturing sector, since the actual figure of 51.1 was an order of magnitude lower than last month, which was 52.7. Thus, it was quite natural to expect an increase in the chart of the EUR/USD currency pair due to the weakness of the dollar. Traders' reactions can be seen below:
Under the pressure of yet another negative news on the dollar, the chart quickly went up and continued to grow for 9 hours, moving 56 points in the right direction.
On October 1, 2015, the next negative indicators for the dollar came out, as there was a reduction in business activity from 51.1 to 50.2. It is quite expected that the market will react in the form of growth in the EUR/USD currency pair. The actual reaction can be seen below:
The reaction to the news can safely be called sluggish, because the price moved only 22 points within an hour, after which it entered a prolonged sideways trend and returned to the original entry point into the position.
Having studied the price behavior after the publication of news in history, you are faced with another situation where analysts simply overestimate the real impact of a given index on market participants. Of course, in all four examples, the news worked itself out, and the chart actually moved in the direction of the indicator, but do not forget that there was not a single trend reversal or strong movement, as such an influence is often attributed to this news.
If you calculate the probable profit when working on this news, then in the end you can get the following numbers: 22+22+22-22=44 points. Take profit and stop orders were taken based on the minimum movement, and one negative trade was received due to the fact that in one of the options the price went against the news by about 30 points.