The euro dived 1% versus the US dollar across the previous week. After opening the week at US$1.12 the pair plummeted to close at US$1.1090. The pair is holding at this level in early trade on Monday.
| 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. |
Fears over the health of the German economy weighed on the value of the euro across the previous week. The euro devalued following data showing that the German economy contracted in the second quarter and that economic sentiment was at its lowest level since 2011. As the US — Sino trade dispute continues, the negative effects of slowing global trade is growing increasingly noticeable on exporter Germany’s economy.
This week is another important week for eurozone data releases. First up, this morning, will be eurozone inflation numbers. Analysts are predicting that inflation ticked lower in July compared to the month previous by -0.4%, this is significantly down from June’s 0.2%. On an annual basis, analysts are forecasting that inflation will remain steady at 0.9%. This is well below the European Central Bank’s (ECB) 2% target. Weak inflation will boost investor expectations that the ECB will look to loosen monetary policy in September, possibly by cutting interest rates.
| 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. |
Fed Chair Jerome Powell’s Speech On Friday
The dollar started the previous week on the back foot amid growing fears that the ongoing US — Sino trade dispute could cause a recession in the US. However, strong US retail sales data and higher inflation boosted the mood towards the greenback as investors’ fears eased. Yet Friday saw the dollar on the decline once again as university of Michigan consumer sentiment data showed that consumers attitudes grow gloomier in August with the index sinking from 98.4 to 92.1.
The central focus this week will be on an appearance by Federal Reserve Chair Jerome Powell at the central banker gathering in Jackson Hole, Wyoming. Whilst recent US data has been strong, investors are fully expecting the Federal Reserve to cut rates in September, owing to growing uncertainty from trade policy and slowing global growth. That said, the Fed called July’s rate cut an “in cycle adjustment” suggesting that there might not be another cut so soon. Dollar traders will be watching carefully for Jerome Powell to reset monetary policy expectations. Hints of another cut in September could send the dollar lower.
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