The euro moved higher against the U.S. dollar on Wednesday, although the currency pair still remained within a very tight range of just 40 points.
The euro gained 0.2% versus the dollar, taking the exchange rate to $1.1164. Despite small moves recently, the euro has gained over 5% versus the dollar in the last three months.
|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.
The euro has had a very quiet week this week, with almost nothing in the way of trading catalyst to drive price movement. This should all change today, with investors set to receive the first important piece of data in the form of an Economic bulletin from the European Central Bank (ECB). The report will give a summary as to the current economic climate in the eurozone in addition to offering projections of economic indicators like growth and inflation. Should the data present a solid growing economy and the ECB sound upbeat regarding inflation projections, then the euro could find itself taking another step higher.
|Why does strong economic data boost a country’s currency?|
|Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.|
In parallel, the U.S. dollar has also been short of high impacting data. However, U.S. Federal Reserve speakers offered some direction to the buck earlier in the week. Fed speakers Dudley and Rosengren had been supportive of more interest rate rises before the end of the year. However, the latest Federal Reserve speaker to hit the circuit, Kaplan, is also a voting member of the Federal Reserve’s Open Monetary Committee (FOMC). He was less in favour of another interest rate rise soon, which took the edge off the dollar rally only six days after the Federal Reserve raised the interest rate.
|Why do raised interest rates boost 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. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.|
Today sees another Federal Reserve speaker giving his views on the position of the U.S. economy and the possibilities of interest rates moving higher. Furthermore, investors will also get a little more in the way of economic data. Initial jobless claims that come out today will give the number of Americans filing for unemployment benefits. Analysts are anticipating a figure of 240,000. This data provides an indication as to the strength of the labour market, which in turn influences the strength and direction of the U.S. economy as a whole. A figure lower than 240,000 should be considered as a positive and could push the dollar northwards.
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.