For this article, I want to circle back to a previous piece on the Purchasing Managers Index. We covered the theory behind this indicator/s in terms of how to understand what they report, but also how we might expect them to affect the markets. As we continue to add tools to our collection of economic features for the forex markets, we need to add some visualisations of real-world examples to our theories and hypotheses. This article takes a look at the UK Services PMI, alongside UK Quarter-on-Quarter (QoQ) GDP and a couple of currency pairs (GBPUSD and EURGBP). The goal here is to demonstrate some methods of initial data exploration that we might conduct to see if there is any basis to our theories.
UK Services PMI
The best description for this indicator comes from Investing.com, which describes the UK Services PMI as “a diffusion index incorporating survey results provided by firms in the services sector throughout the country.” A figure below 50 suggests that the sector is shrinking, whereas a reading above 50 will therefore indicate an expansion of said sector.
The Services PMI is considered to be one of the best barometers for economic activity, particularly for the UK and the reason behind this is due to the way the UK economy is set up. The services industry has consistently contributed to over 70% of the total UK GDP, with financial services leading the way within this. Because of this, managers in the services industry have a major influence and idea on the potential future direction of the UK economy.
UK Services PMI vs EURGBP & GBPUSD
The purpose of this newsletter is to investigate whether these economic indicators have any bearing on or relationship with currencies and the follow two charts look into this. Below you’ll see the monthly values for the UK Services PMI along with the closing prices for the EURGBP and GBPUSD.
Given that our theoretical understanding is that as the PMI increases, the value of the currency would also increase, we have to make adjustments to what we’re looking for in the graphs based on the currency pair we’re investigating. For example, since “GBP” is the second part of EURGBP, a fall in the value of this pair would indicate a rise in the value of the GBP and fall in EUR. Conversely, a rise in the price of GBPUSD would indicate a rise in the value of GBP and corresponding fall in USD.
UK Services PMI vs Most Recent UK GDP QoQ Figure
The following chart compares the Services PMI to the most recent UK GDP figure. What looks to be fairly repetitive with most of the charts we look at is the effect the Covid pandemic has had on all economic figures. I do believe however, that in this specific case, that distortion might help to establish an interesting relationship -> the PMI figure could be a leading indicator of GDP by roughly 3 - 4 months. This could be an interesting revelation if we discover that the relationship is able to hold up to statistical testing.
All interactive charts can be found on the Algo-Fin tableau page, located here