Despite Italian political instability, the euro US dollar pushed northwards in the previous session to close up 0.2% at US$1.1098, snapping a 5-session losing streak. The pair is holding steady in early trade on Wednesday as investors look ahead to the minutes from July’s FOMC.
|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 Prime Minister Giuseppe Conte resigned on Tuesday, blaming Matteo Salvini, the League leader and partner in the coalition for its collapse. The not so surprising move by Conte has deepened the Italian political crisis after months of in squabbling between the two ruling parties.
A period of consultation will now take place with Italy’s President deciding whether there is potential to form a new coalition, or whether Italy need to have another general election, the second in two years, to elect a government. Should Conte’s resignation result in an election, Autumn is looking like a likely date. This in itself is problematic given that it could interrupt negotiations between Italy and the EU over fiscal spending plans.
The League was the junior party within the coalition. However, since then Matteo Salvini, the League’s leader has emerged as the most prominent Italian politician, even eclipsing 5 Star’s Luigi Di Maio.
The overriding concern for euro investors is Salvini’s desire for “courageous fiscal policy”. This will almost certainly go against strict EU rules on spending and debt limits. Any signs that the already heavily indebted Italy is taking on higher levels of debt could quickly unnerve euro investors.
Today there is no high impacting eurozone data. Investors will continue to monitor developments in Italy, as well as looking ahead to eurozone PMI data due on Thursday.
US Federal Reserve Policy Meeting Minutes
The dollar slipped lower in a quiet previous session. With no influential US data, nor US — Sino trade dispute headlines, the dollar drifted lower on Tuesday.
Today the focus will be squarely on the release of the US Federal Reserve monetary policy minutes from the late July. The minutes will enable investors to scrutinise deliberations by the Fed after the first cut in interest rates in a decade. Investors are fully expecting a rate cut again in September. They will be looking at today’s minutes for clues as to whether this is still likely.
|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.|