The euro US dollar exchange rate dropped to a low of US$1.0947 on Wednesday. The pair ended the session not far above this and also not far from the multi-year low set in September of US$1.0926.
The euro has been under pressure after disappointing data releases earlier in the week. German manufacturing PMI figures were worryingly weak and whilst German IFO business sentiment moderately improved, the expectations element of the index was surprisingly downbeat.
Today euro investors will stay focused on the eurozone economic calendar with the release of the European Central Bank’s monthly economic bulletin. A speech by ECB President Mario Draghi at the European Systemic Risk Board annual conference in Frankfurt today will also be closely eyed. Investors will be watching carefully to see if Draghi defends the central bank’s recent decision to ease monetary policy. The ECB cut the overnight interest rate and restarted the bond buying programme to get more money flowing around the financial system. Should Draghi remain negative over the outlook of inflation and the eurozone economy, the euro could fall further.
| 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. |
Will US GDP Weigh On US Dollar?
The dollar rallied in early trade on Wednesday with political risk boosting risk aversion as Donald Trump faced an impeachment investigation. The dollar then rallied on relief after Trump released the transcript of the phone calls in question. The Department off Justice ruled that Trump hadn’t violated campaign finance laws.
Away from President Trump’s domestic political troubles, trade is never far from the minds of dollar investors. Comments from President Trump that a trade deal with China could happen “sooner than you think” lifted the mood in the market just enough so as to not hurt demand for the dollar.
Today investors will turn towards US GDP data for further clues as to the health of the US economy. Analysts are expecting the final revision of second quarter GDP to print at 2% annually. This would be down from the initial 2.1% print and considerably down from economic growth in the first quarter which was 3.1% year on year.
So far US consumers have continued spending thanks to the strong labour market, which is keeping the US economy afloat even as the manufacturing sector slumps.
| 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. |
