How does Purchasing Manager Index (PMI) and Producer Price Index( PPI) affect forex

 PRODUCER PRICE INDEX(PPI in forex)

PPI in forex measures the average change in selling price overtime. This includes;  finished goods, industrial goods, commodity goods and the semi- processed goods.

It is computed by taking the average price changes at the whole sale or production level.

PPI measures the direction of prices and inflation.

The core producer price index ( Core PPI) excludes the more volatile price changes seen in energy and food  commodities.

 Apart from CPI, the Central bank also relies on PPI as a basis to adjust the interest rates and other monetary policies.

PMI – PURCHASING MANAGERS INDEX

An economic indicator that measures manufacturing conditions and performance per months by tracking reports of purchasing managers over time.

It is released on the first business day of the month at 10am by the Institute for Supply management ( ISM).

The report indicates growth when the value is above  50% and contraction when below 50%.

PMI works better when used along with the producer price index and the GDP along with the ISM report on Non-manufacturing businesses.

PPI in forex effect on the market.

Most traders use Producer Price Index (PPI) to assess the inflationary pressure with in the country’s economy.

It is the changes in the PPI data that bring an impact on the economy as well as the forex market.

When the PPI data release is higher than the market expectations,

it signals a future inflation or further increase in prices of consumer goods.

This is bad for the economy because it discourages consumers from saving and reduces their purchasing power.

As a result the central bank is likely to react to this situation by hiking interest rates to curb down inflation hence increasing that currency’s value.

High interest rates reflect future economic growth. Therefore as more investors come in,the currency value appreciates.

As a result, the Forex market will go bullish.

On the other hand,

when the PPI data comes out lower than expected, it signals a future deflation or further fall in prices of consumer goods and services.

This is bad for the economy.

More people will save than spend which may result to the country’s economic slowdown.

During this period, the currency is very expensive and the consumers prefer to save than spend because they expect prices to fall further in future.

If prices continue to fall, the central bank cuts down interest rates to encourage spending and borrowing.

When this happens the currency will lose value relative to other currencies investors hold.

As a result, the investors will sell off their positions and the forex market will become more bearish.