Positive news on Brexit combined with dismal US retail sales data sent the euro US dollar exchange rate soaring on Wednesday. The pair rallied to a 1 month high of US$1.1085. The euro US dollar exchange rate is flat in early trade on Thursday
The euro has been broadly in favour across the week as Brexit optimism picks up. Whilst the pound is the clear winner from a Brexit deal, economies in the eurozone would also benefit from a Brexit deal. This is because it would reduce uncertainty and remove risk. Both German Chancellor Angela Merkel and French President Macron have said that the Brexit deal is being finalised. However, Boris Johnson could still have problems with the Northern Irish DUP party.
Brexit optimism over shadowed weak eurozone inflation figures. Inflation in the bloc declined to 0.8% year on year in September. This was down from 1% in August and continues to move away from the European Central Bank’s 2% target. The ECB took action at the last meeting, in September, to address stubbornly low inflation in the bloc. The ECB cut overnight interest rates and restarted its bond buying programme. It is still too soon to tell whether further monetary easing will be needed.
|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 there is no high impact eurozone data. Investors will keep a close eye on Brexit developments.
Dollar Drops On Dismal Data
The dollar traded lower versus all of the major currencies on Wednesday following an atrocious retail sales report. US retail sales declined -0.3% month on month in September, well short of the 0.6% increase in August. The US consumer has, until now, been spending well keeping the US economy resilient, amid the manufacturing slump. However, the weak retail sales data sparked fears that the slowdown in the manufacturing sector is now spilling over into consumer spending. This has unnerved dollar investors given the reliance of the US economy on consumers.
Today sees a slew of mid-tier data being released. The most closely watched will be US manufacturing and manufacturing production. Analyst are expecting -0.2% and -0.3% declines respectively month on month in September. Weak figures could fuel concerns over the state of the US manufacturing sector, particularly as the US – China trade dispute is unlikely to end anytime soon. Investors could grow increasingly nervous that the US is heading for an economic slowdown. In this case the Fed may be tempted to cut interest rates again this year.
|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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