The EUR/USD exchange rate had a volatile session on Wednesday adding to the sharp gains from Tuesday’s session. The euro strengthened by 0.3% against the dollar, hitting a high of $1.1390, whilst the day’s low was some 100 points lower.
|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.
Tuesday saw the euro hit a one year high versus the dollar, after European Central Bank (ECB) President Mario Draghi hinted towards a tightening of monetary policy in the eurozone. Draghi acknowledged a broad recovery in the region whilst pointing out that inflation was still below where it needed to be. However, a subtle shift in language created a stir among investors.
The markets were hoping for an encore on Draghi’s second day of speaking at the ECB Central Bankers Forum in Portugal. However, they were disappointed. The ECB instead said that the market had misjudged Draghi’s previous comments, reining back interest rate expectations, which had increased following Draghi’s speech. When interest rate expectations decrease the currency value drops.
|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.
The euro dived 0.7%. Nevertheless, it was quick to recover, finishing the session 0.3% higher versus the buck thanks to dollar weakness.
Today’s focus moves away from central bankers and back towards economic data. The eurozone economic sentiment indicator gives an insight into consumer confidence in economic activity. A reading that is stronger than what analysts anticipate could boost the value of the euro.
|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.
The mood for the dollar has been weak. Concerns are rife that Trump will be unable to push his pro-dollar agenda through Senate. Additionally, recent economic data has been disappointing on a regular basis. Yesterday’s pending home sales were just another example of weakness in the U.S. economy. Earlier in the month construction data was softer and durable goods orders this week came in twice as bad as analysts had forecast.
Today investors will be anxiously glancing towards the final release of the U.S. GDP. The preliminary figure printed in May was 1.2% and the final release is forecast to be the same. Should the reading be lower than 1.2% then the dollar could continue to be under pressure heading towards the weekend.
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.