The euro moved steadily lower versus the US dollar on Thursday. The euro US dollar exchange rate dropped to a nadir of US$1.1042 as concerns over the health of the German economy hit demand for the common currency. The pair is drifting lower in early trade on Friday.

 

What do these figures mean?
When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.

For example, it could be written:

1 EUR = 1.12829 USD

Here, €1 is equivalent to approximately $1.13. This specifically measures the euro’s worth against the dollar. If the U.S. dollar amount increases in this pairing, it’s positive for the euro.

Or, if you were looking at it the other way around:

1 USD = 0.88789 EUR

In this example, $1 is equivalent to approximately €0.89. This measures the U.S. dollar’s worth versus the euro. If the euro number gets larger, it’s good news for the dollar.

 

Growing evidence that the German economy is heading for a recession weighed on the euro in the previous session. German unemployment increasing and inflation moving lower added to signs that the largest economy in Europe was running out of steam.

Inflation declined -0.2% month on month, taking it to 1.5% annually. This is well below the ECB’s 2% target. Additionally, unemployment rose by 4000 after months of remaining resilient. The increase in unemployment erodes employment growth that the German economy has enjoyed over the past few months. These numbers are just the latest in mounting evidence that Europe’s largest economy is heading for a recession.

Given the weak data, market participants are expecting the European Central Bank to loosen monetary policy when they meet in September.

 

Why do interest rate cuts drag on a currency’s value?
Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Lower interest rate environments tend to offer lower yields. So, if the interest rate or at least the interest rate expectation of a country is relatively lower compared to another, then foreign investors look to pull their capital out and invest elsewhere. Large corporations and investors sell out of local currency to invest elsewhere. More local currency is available  as the demand of that currency declines, dragging the value lower.

 

Today data remains very much in focus with German retail sales and European inflation due for release. Analysts predict that German retail sales will decline by -1%, indicating that the slump in the German manufacturing sector is spilling into the consumer sector. Analysts are also expecting a lacklustre reading for Eurozone inflation. This could send the euro lower.

Trade Optimism Boosts Dollar

The dollar was broadly in demand in the previous session, which is carrying over into Friday. Optimism surrounding the US – Sino trade dispute is helping the dollar advance. China, unexpectedly adopted a more conciliatory tone, saying that they weren’t planning on retaliating to Trump’s tariff increases imminently. Instead they are interested in collaborating and talking. Negotiations are being set up for September.

The ongoing US – Sino trade dispute has caused a slump in the US manufacturing sector. Investors are nervous that the ongoing dispute is having a negative impact on the US and global economy. Signs that the two sides could start talking again is a positive for the US economy and is boosting the dollar.

 

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