The euro US dollar exchange rate rallied to an October high of US$1.1179 on Monday, before steadily easing lower towards the close. The pair ended the session flat at US$1.1150. The euro is advancing cautiously in early trade on Tuesday.

Given the sparse macroeconomic calendar and Brexit uncertainty, the euro lacked direction. Brexit remains unresolved with just 9 days to go until the UK leaves EU. Investors are increasingly convinced that the UK will avoid a no deal Brexit.

Boris Johnson will put his Brexit agreement bill to the House of Commons for a vote today. The Financial Times reported that given historical voting patterns and recent discourse, Boris Johnson should have a majority. In this case he will attempt to fast track Brexit legislation through the Commons and the Lords to leave the EU on 31st October.

Any move towards a Brexit deal could boost the euro. This is because it reduces uncertainty and risk in eurozone economies.

There is no high impacting eurozone data release until Thursday’s pmi readings. The same day investors will be looking towards the European Central Bank’s monetary policy announcement.

This will be the final sitting for ECB President Mario Draghi, before he is replaced with Christine Lagarde. The ECB cut overnight interest rates and restarted the quantitative easing programme in the September meeting. Analysis do not expect the ECB to ease monetary policy further this month. Investors will be watching closely for any signs of a more dovish stance from the deeply divided central bank.

 

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.

 

US Recession Concerns Linger

After a weak start to trading on Monday, the dollar reversed earlier losses to finish the session in positive territory.

With little in the way of macroeconomic data, the dollar drifted for most of the session. The US dollar has been under pressure in recent weeks amid growing signs of weakness in the US economy, which has led to higher bets that the US Federal Reserve could cut interest rates when they meet later this month.

Improving US – China trade relations has been the other driving factor for the dollar. Recent reports that the two sides are close to a deal has boosted riskier currencies rather than the safe haven dollar.

Today there is some mid-tier US data due to be released, such as existing home sales. Analysts don’t expect this to impact the dollar greatly.

 

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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