Euro fixing slips as French PMI falls below 50: what a PMI tells you

The euro eased again in the European Central Bank's reference rates on October 23. The EUR/USD fixing fell 0.11% to 1.1193, from 1.1205 a day earlier, after business surveys from France and the wider eurozone came in weaker than forecast.

investingLive reports that France's October flash composite PMI dropped to 48.4, against 50.5 expected, as the French private sector "falls back into contraction" amid political and financial concerns. Investing.com summed up the session as "yen rallies, euro sags, dollar shrugs". The euro fixing is now 0.53% below its October 16 level. Our sister site has a fuller market wrap on the euro sagging as the French PMI slumped into contraction. You can follow the pair on a EUR/USD chart.

What is a PMI?

PMI stands for Purchasing Managers' Index. Each month, a survey company asks purchasing managers at businesses simple questions. Is output higher, the same or lower than last month? Are new orders rising or falling? The answers are turned into one number.

The key line is 50:

• Above 50 means activity is growing compared with the month before.
• Below 50 means activity is shrinking (contraction).
• The distance from 50 shows how broad the change is.

There are usually three versions. Manufacturing covers factories. Services covers businesses like shops, banks and restaurants. Composite blends the two. A flash PMI is an early estimate based on most of the survey replies, published before the month ends. That is why traders watch it closely.

A worked example

Here are the October flash composite PMIs, as reported by investingLive for France, the eurozone, Germany and the UK.

Read each number in three steps.

1. Versus 50. France: 48.4 - 50 = -1.6, so activity is shrinking. The eurozone: 51.9 - 50 = +1.9, so it is still growing.
2. Versus forecast. France: 48.4 - 50.5 = -2.1, a large miss. Eurozone: 51.9 - 52.7 = -0.8. UK: 53.1 - 51.8 = +1.3, a beat.
3. Versus last month. Eurozone: 53.1 - 51.9 = 1.2 points lower. Growth continues, but more slowly.

Now the currency. The EUR/USD fixing moved from 1.1205 to 1.1193. That is 1.1193 - 1.1205 = -0.0012. As a percentage: -0.0012 / 1.1205 x 100 = about -0.11%.

Why it matters for new traders

PMIs arrive early, so they are among the first clues about how an economy is doing each month. A weak reading can change expectations for interest rates. investingLive notes the eurozone miss keeps the ECB's "rate hike dilemma alive".

But a PMI is never the only driver. The UK beat forecasts, yet the GBP/USD fixing still slipped 0.06% to 1.3368. Investing.com reported the pound slipped as a risk-off sell-off weighed on currencies. investingLive also reported that UK September retail sales fell 0.4%, against -0.1% expected. Good news in one report can be outweighed by other data and the wider mood.

Remember too that ECB fixings are one official rate per business day, not live prices. Moves during the day can be larger or smaller than the fixing shows.

Key terms

• PMI: a monthly survey index of business activity. 50 separates growth from contraction.
• Flash PMI: an early estimate released before the month ends.
• Composite PMI: a blend of manufacturing and services readings.
• Contraction: a reading below 50, meaning activity is shrinking.
• Reference rate (fixing): the ECB's single official exchange rate for a business day.