With both the euro and the US dollar under pressure on Monday, the euro US dollar exchange rate remained relatively flat. The pair traded close the session 0.1% higher at US$1.1216 after hitting a high of US$1.1230 earlier in the session. The euro US dollar exchange rate is declining in early trade on Tuesday.
| 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. |
Italian political risk and fears over a German recession are weighing on the value of the euro.
Italian Deputy Prime Minister Matteo Salvini called a general election in Italy citing an irreparable breakdown between coalition parties. Right wing Mr Salvini is ahead in the polls, made popular by his pledges to cut taxes and immigration. However, euro investors are not in favour of any pledge to cut Italian taxes, given the country’s enormous debt pile. Low taxes would only worsen Italy’s debt situation, stoking fears of a second European debt crisis.
Data last week highlighted the troubles the German manufacturing sector is encountering as the exporter nation is hit by slowing global trade as the US — Sino trade dispute escalates. Investors are now looking towards German GDP data on Wednesday which analysts believe will show that Europe’s largest economy contracted.
Prior to tomorrow’s economic growth data, German ZEW economic sentiment figures will be under the spotlight today. Analysts are expecting to see German confidence fall once again after July’s big miss. Weak data could hit demand for the euro.
| Why does poor economic data drag on a country’s currency? |
| Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall. |
Will US Inflation Drag Dollar Lower?
Growing concerns that the ongoing US — Sino trade dispute is negatively impacting the US economy pulled the dollar southwards in the previous session. However, the dollar has managed to recoup those losses early this morning.
Today investors will focus their attention back on the US economic calendar. US inflation in the form of consumer price index (CPI) will be under the spotlight today. Analysts are expecting CPI data to show that US inflation remained steady at 2.1% year on year in July. On a monthly basis, analysts are forecasting that US inflation will have increased 0.2% in July, down from an increase of 0.3% the previous month. Should inflation be lower than what analysts forecast, demand for the US dollar could be hit. Lower inflation means another Fed rate cut could be coming.
| 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. |
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