The euro US dollar exchange rate slipped across the previous week despite the Federal Reserve raising interest rates. The pair declined 0.5% to close on Friday at US$1.1018. The pair dropped again in early trade on Monday following disappointing PMIdata.
The euro faced renewed selling pressure in the previous week after the European Central Bank (ECB) loosened monetary policy earlier in the month. The ECB restarted its quantitative easing (bond buying) programme. The central bank also cut overnight deposit rates. These actions are an attempt to get more money flowing around the financial system and consequently devalued the euro.
Today investors will focus on eurozone and German PMI figures. PMI figures from Germany showed that the German manufacturing sector slipped deeper into contraction in September. The PMI figure dropped to just 41.9, well below the 44 level forecast by analysts. The level 50 separates expansion from contraction.
The service sector in Germany, which had been shielding the economy from the weak manufacturing sector, was also showing signs of strain. The figures have fuelled concerns that Germany is heading for recession. This is weighing on demand for the euro.
| Why does poor economic data drag on a country’s currency? |
| Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall. |
Investors will now look towards eurozone pmi figures. More weak data could drag the euro lower. Later today ECB President Mario Draghi will make an appearance before the European Parliament. Investors will watch his speech closely for clues over monetary policy going forwards.
Will US PMI Data Boost Dollar?
The US dollar rallied versus its peers in the previous week after the Federal Reserve was less dovish than what analysts and investors had been expecting. As predicted the Fed cut interest rates. However, the Fed also indicated that it was not planning on cutting interest rates again across the rest of the year. Investors had been assuming at least one if not two more cuts were on the way before the year ended. As investors pushed back the probability of further cuts the US dollar moved higher.
This week investors will be watching US data closely. Strong data releases across the week could cause investors to cool further the prospects of rate cuts. Today US PMI figures will be in focus. Analysts are expecting US service sector activity to have increased in September, which could boost the dollar. Strong data could cause investors to cool further the prospects of rate cuts by the Fed. Later in the week US GDP figures could also offer investors useful clues as to the health of the US economy.
| 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. |
| 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. |
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