Concerns over the health of the manufacturing sectors in both Germany and the US kept the euro US dollar exchange rate well matched on Friday. The pair closed at US$1.1084. Today the dollar is pushing higher versus the euro in early trade.
|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 was broadly out of demand in the previous session despite pmi data from Germany, France and the bloc as a whole coming in better than analysts had forecast. German manufacturing pmi unexpectedly improved to 43.6. Analysts had been expecting a reading of 43, whereby 50 separates expansion from contraction.
Yet despite the tick higher in the data, the fact is the German manufacturing sector remains deep in contraction. The exporter country is being negatively impacted by slowing global trade amid the ongoing US — Sino trade dispute. There are also signs that he weakness in the manufacturing sector is slipping into the service sector. The service sector pmi touched a 7-month low.
The soft German data points to continued weakness in Europe’s largest economy. The German economy slipped into contraction in the second quarter and this data supports the theory that a contraction in the third quarter is also looking likely. Under these conditions the European Central Bank are likely to consider loosening monetary policy when they meet in September.
|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.|
US Manufacturing Contracts
Data showing that the US manufacturing sector slipped into contraction in August for the first time in almost a decade, knocked demand for the dollar in the previous session. The US manufacturing pmi unexpectedly dropped to 49.9 in August, below the 54.4 analysts forecast. 50 separates expansion from contraction. The manufacturing sector has come under pressure amid the ongoing US — Sino trade war.
Today dollar investors are completely focused on a speech by Federal Reserve Chair Jerome Powell who will speak at the annual central bankers gathering at Jackson Hole, Wyoming. Investors will be watching for signs as to the Fed’s next steps; whether the central bank will cut rates in September?
According to the CME FedWatch tool, investors are assuming a 93.5% probability of the Fed cutting rates. This is down from 100% earlier in the week. Should Fed Powell sound less cautious the dollar could move higher.
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