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After a weak start, the euro advanced versus the US dollar on Thursday. The euro US dollar exchange rate pierced US$1.10 declining to a low of US$1.0989, its weakest level in a month before rebounding. Weakness in the dollar in the US session sent the pair northwards. The euro closed Thursday’s session 0.1% higher on the day, snapping a two-day losing streak. The euro US dollar exchange rate is holding steady in early trade on Friday around US$1.20. Across the week, the euro is trading flat versus the US dollar.
Germany Avoids Recession
The euro declined in early trade on Thursday despite data showing that Germany unexpectedly and narrowly avoided a recession. German GDP in the third quarter increased 0.1% quarter on quarter. This was above the -0.1% contraction that analysts had forecast. The data was a relief for market participants who assumed two consecutive quarters of contraction were on the cards. However, analysts warned that signs of recovery in Germany and the eurozone were still weak.
Eurozone Inflation
Today investors will look ahead to eurozone inflation data. Analysts are expecting inflation, as measured by consumer price index, to have remained steady in October at an almost stagnant 0.7% year on year growth in October. Core inflation, which excludes more volatile items such as food and fuel is expected to remain at 1.1% year on year in October.
Lacklustre inflation is proving to be a real problem for the European Central Bank. Despite cutting the overnight interest rate and restarting the bond buying programme in September, inflation remains substantially below the ECB’s 2% target. A weak reading today to prompt investors to assume that the ECB will consider easing monetary policy further in the coming months.
The new ECB President Christine Lagarde, like predecessor, Mario Draghi has been vocal about the need for European governments to ramp up fiscal spending in order to boost inflation and support their economies, taking some of the pressure off the ECB. However, Germany, Europe’s largest economy remains firmly against the idea, with the German finance minister saying that Germany was not in a financial crisis and that there was no immediate need for a spending boost.
Dollar Investors Cautions Over Trade Headlines
Risk off sentiment boosted the US dollar in early trade on Thursday. Weak Chinese industrial production and very soft growth in Germany raised concerns over the health of the global economy. This combined with ongoing political tensions in Hong Kong and mixed messages over US — China trade boosted demand for the safe haven dollar. The dollar gave up those gains later in the session, whilst there was no obvious catalyst analysts pointed towards Trump’s impeachment trial as a possible factor.
Trade Deal Soon
Today risk sentiment is picking up after comments from White House Adviser Larry Kudlow. Mr Kudlow said that a trade deal between China and US was very near. His comments come after a week of mixed messages over progress towards a phase one trade deal. Earlier in the week, President Trump spoke at the Economic Club of New York. Whilst he said a trade deal could come soon, he also threatened to increase trade tariffs if the deal failed to materialise. Investors are cautious of Larry Kudlow’s remarks. All too often optimistic trade deal comments have been quickly followed by conflicting headlines. The trade deal progress has been marred by two steps forward one step back throughout the process.
A trade deal and the thawing of trade tensions between the US and China is the most closely watched factor driving the greenback. A trade deal between the two could boost the US economy and help the US manufacturing sector to rebound. In this case the Fed would hold off cutting interest rates further, which is dollar positive. On the other hand, a trade deal between the two nations would boost risk appetite. Given the dollar’s safe haven status a deal could hit demand for the greenback. For this reason, it is difficult to predict how the dollar will react as prospects of a trade deal increase or decrease.
Any further trade headlines through today’s session could create volatility around the dollar.
US Retail Sales
Today investors will also look towards US retail sales figures. Analysts are predicting that US retail sales rebounded in October, jumping 0.2% month on month. This would be well above September’s -0.3% decline. The dollar declined sharply following last month’s disappointing retail sales figures, as investors feared that the slowdown in the US manufacturing sector was spilling across into the consumer sector. Today’s figures, if strong, could calm those fears, supporting Federal Reserve Chairman Jerome Powell’s opinion that the US economy is doing well and no more easing is needed for the foreseeable future.
| 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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