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EUR/USD: Euro Looks Vulnerable Ahead Of Sentiment Data

15th October 2019

The euro was well matched versus the US dollar in the previous session. The euro US dollar exchange rate concluded Monday at US$1.1027, the same level that it had started at. The pair is slipping lower in early trade on Tuesday.

The euro was traded broadly flat versus its peers on Monday as investors mulled over the implications of the US — China agreement reached last week, eurozone industrial production data and looked ahead to today’s sentiment data.

Investors digested a mixed industrial production data report. Industrial production increased 0.4% month on month in August, ahead of the 0.3% analysts had predicted. However, on an annual basis production fell -2.8%. This was worse than the -2.5% forecast and marked the 10^th consecutive month that industrial production, on an annual comparative basis, had fallen. The data fuelled concerns over the outlook of the eurozone economy and prompted further speculation that the eurozone was tipping into recession.

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 focus on today’s ZEW economic sentiment reading. The euro could remain vulnerable around the release. Economic sentiment has been falling across recent months as the economic slowdown takes hold. September saw a small rebound in sentiment; however, analysts believe that was an anomaly rather than the start of a new trend.

Dollar Lifts As Geopolitics In Focus

The mood towards the dollar improved on Monday as investors fretted over the outlook of the global economy. Investors re-evaluated the pact between the US and China agreed last week and viewed it to be little more than a truce, rather than a meaningful trade deal. Meanwhile weak trade data from China served as a reminder of the damage the ongoing trade dispute was having on the world’s second largest economy. As fears increased, investors look towards the US dollar for its safe haven status.

Increased geopolitical tensions between US and Turkey are boosting demand for safe havens on Tuesday. US President Trump saying that he is ready “to destroy the Turkish economy” unnerved investors. Trump also announced sanctions on Turkey, after it advanced into Syria, days after he pulled US troops from the area.

With no US economic data to focus on, investors will continue watching geopolitical developments closely.

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.