Global Flash PMIs To Set Rate Oulook (BOE, ECB, Fed)

The market’s focus is shifting to economic growth instead of inflation as the main predictor of central bank action. This makes Friday’s first look at leading economic activity data for August particularly important for Forex movements. Flash PMIs offer insight into economic growth and pricing trends before the official data comes out two weeks later. This allows traders to anticipate trends.

Most major central banks are facing inflation pressure from higher energy prices and a rebound in their economies after they lowered rates last year. This means that markets broadly expect them to raise rates by the end of the year. What differentiates them, and therefore will drive currency pairs, is the timing of those hikes. Differences in economic performance will likely determine that timing. Traders can anticipate those differences by tracking the evolution of PMI figures.

Which Central Bank Will Go First?

Currencies that are likely to gain against their peers will be the ones where investors expect higher interest rates sooner. That would be among economies that are accelerating, while economies that are slowing down would likely delay rate hikes or not raise them at all. Those currencies are likely to weaken.

While all major economies are in expansion, as defined by PMIs over 50, the relative direction of the move will likely determine the outlook. A substantial miss of more than 0.5 points against expectations could have a stronger impact. This could change the odds of a rate hike and move the currency accordingly.

What the Market Is Looking For

First up is the release of individual European countries that tend to set the tone for the whole of the Eurozone data that comes out a couple of hours later. Markets are looking for confirmation that the economy is continuing to rebound. This would affirm expectations that the ECB will hike at its next meeting in September and support recent strength in the Euro.

Economists have pointed out that the shared economy’s recent growth has come from the services sector. This could relate to temporary factors, such as the World Cup boosting sales in the non-manufacturing sector in June. A firming in industrial data would help improve the outlook for the Euro.

French flash August composite PMI is projected to rise modestly to 49.9 from 49.4 a month earlier, but remain in contraction. German manufacturing PMI is likely to be the next focus. It is projected to tick down to 52.0 from 52.2 previously, but remain firmly in expansion. Eurozone composite flash PMI is anticipated to slide to 51.6 from 52.0 in July due to a faster cooling in the services sector.

UK and US Lagging in Growth

Next up is the UK, where flash August composite PMI is projected to remain essentially unchanged at 52.1 compared to 52.2 previously. Traders will be watching this data closely as economists see no rate hikes from the BOE this year, while the futures market sees one rate hike as likely.

Finally, US flash composite PMI is expected to stay in expansion but fall notably to 53.2 from 54.5 in July. While this remains above the European reading, the size of the drop is likely to have a bigger impact on the outlook. The market is still pricing in one rate hike from the Fed later this year, but not until October.