Strong US service sector activity data helped the dollar pare early losses in the previous session. The euro US dollar exchange rate rallied to a high of US$1.1084 before easing back to close flat on the day at US$1.1034. The pair was holding steady in early trade on Friday.
| 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 ended the previous session flat versus the dollar despite more very disappointing data from Germany. German factory orders declined -2.7% month on month in July. This was well below the -1.1% drop that analysts had pencilled in. The data showed that orders from outside of the eurozone fell heavily. New orders from foreign buyers dropped a huge 6.7% in July from June; a much larger fall than the 0.5% decline in domestic orders. This is the latest sign of how Europe’s largest economy has fallen victim to the US — Sino trade war.
The overall trend in the German manufacturing sector is very weak, and recent surveys and data indicate that the sector will remain in contraction for some time. Germany’s economy contracted as a whole in the second quarter and analysts expect it to move into a recession in the third quarter.
The European Central Bank (ECB) is due to meet next week. City analysts widely believe that the central bank with unveil further stimulus policies. This could include a rare cut.
| 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 a slew of eurozone data for investors to digest. This will include German industrial production data and eurozone GDP figures.
US Service Sector Remains Strong
The dollar pared losses in the previous session following the release of stronger than forecast service sector data. The ISM non-manufacturing reading shot higher in August printing at 56. This as well above the 54 figure that analysts had forecast.
The impressive performance of the US service sector is important for two reasons. Firstly, it is the dominant sector in the US economy so should keep the US economy buoyant. Secody it means that the slump in the US manufacturing sector is not spilling over into the service sector.
Today the focus will be squarely on the US non-farm payroll figures. Analysts are expecting that 160,000 jobs were created in August. This would be on par with July. Unemployment is expected to have remained at multi decade lows, whilst earnings growth is due to have cooled slightly. The private payroll report beat analysts’ expectations on Thursday. Economists consider this an indication that NFP could beat expectations. A strong report could boost the dollar.
| How does the non-farm payroll (NFP) affect the US dollar? |
| It works like this, when there is low unemployment and high job creation, the demand for workers increases. As demand for workers goes up, wages for those workers also go up. Which means the workers are now taking home more money to spend on cars, houses or in the shops. As a result, demand for goods and services also increase, pushing the prices of the goods and services higher. That’s also known as inflation. When inflation moves higher, central banks are more likely to raise interest rates, which then pushes up the currency’s worth. |
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