The euro dropped lower versus the US dollar on Wednesday as investors digested a downward revision to German economic growth and as investors look ahead to the European Central Bank policy announcement today. The pair dipped to a low of US$1.0985 and closed 0.3% lower at US$1.1013. The euro is moving cautiously higher in early trade.
| 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. |
The Kier Institute for the World Economy downgraded its forecast for German economic growth for 2019. The institute now expects growth of just 0.4% along with a contraction of -0.3% in the third quarter. The data reaffirms the negative outlook for the largest economy in Europe, as the exporter nation is caught up amid slowing global demand and the US — Sino trade dispute.
Germany experienced a contraction in the second quarter, should it experience two consecutive quarters of contraction this is a technical recession. Whilst a technical recession hasn’t yet be confirmed the evidence is suggestive that it is coming.
Today investors will be watching the European Central Bank (ECB) as it gives its monetary policy decision. This will then be followed by a press conference held by ECB President Mario Draghi. Heading towards the announcement market participants are expecting a 0.2% cut in the overnight deposit rate and an announcement surrounding a new bond buying programme, known as quantitative easing. Analysts expect the QE programme to be in the region of €30 billion per month. Should the ECB go further than what the market is expecting the euro could fall further.
Will US Inflation Pull Dollar Lower?
The dollar gained ground in the previous session shifting away from the recent selling bias of the past few days. The move higher came as investors have grown increasingly cautious ahead of a series of central bank policy decisions due over the coming weeks.
In the previous session investors grew nervous ahead of today’s ECB announcement. The dollar benefited from its safe haven status as the world’s reserve currency.
Today investors will look towards the US inflation figures. These are the most closely watched release for US dollar investors this week. Analysts are expecting inflation to tick lower to 1.7% in July, down from 1.8% the previous month. This would be once again below the Federal Reserve’s 2% target. However, analysts predict that core inflation to tick higher to 2.3%. Any weakness in the inflation figures could boost investor expectations of a rate cut by the Fed this month.
| 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. |
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