The euro slipped to a 28-month low versus the dollar in the previous session, before paring losses and snapping a 6-day losing streak. The euro US dollar exchange rate eventually moved higher after weak US data and ended the session flat on the day at US$1.10. The pair is edging higher in early trade on Wednesday.
|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 out of favour early on Tuesday in a quiet start to the session. With no high impacting data investors continued to mull over dismal data from Germany. Europe’s largest economy is in danger of heading into recession as a slump in the dominant manufacturing sector shows signs of spilling over into the rest of the economy.
The European Central Bank (ECB) will meet next week to decide on monetary policy for the eurozone. Market participants believe that there is an 80% probability that the ECB will cut interest rates by 20 basis points when they meet. The prospect of a rate cut weighed on demand for the euro.
|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.|
Today there is little in the way of economic data for investors to digest. Christie Lagarde will be under the spotlight as investors look to see how dovish she is sounding in a speech today.
Fed Speakers In Focus
The dollar dived in the previous session after data showed that the US manufacturing gauge contracted for the first time in three years. The US ISM manufacturing figure unexpectedly dropped to 49.1 in August, missing expectations of 51.5 as the US — Sino trade war weighed on the manufacturing sector and fuelled fears of slowing domestic economic growth. This is the first time since 2016 that the indicator has slipped below 50, a figure which separates expansion from contraction. The details of the report were also rather ugly with new orders, production and employment sub-indices all also contracting.
The weak data is fuelling fears of a US recession and a more dovish approach from the Federal Reserve.
Today investors will be pay attention to speeches by Federal Reserve policy makers. They will be looking for further cues as to the next steps by the Fed.
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