Whist the euro US dollar exchange rate finished Friday flat; the euro pushed 0.3% higher versus the greenback across the week. The pair rallied to a high of US$1.1086, before closing some 60 points lower for the week. The pair was holding steady at the start of the new week.
| 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 under pressure across the previous week as concerns over the health of the German economy grew. German factory orders and German industrial production figures painted a bleak picture for Europe’s largest economy. Exporter nation Germany continues to be negatively impacted by slowing global trade amid on ongoing US — Sino trade war.
Thursday’s European Central Bank meeting will be the highlight of the economic calendar this week. Market participants have grown increasingly convinced that the ECB will unveil new stimulus measures to bolster the sluggish euro area economy. However, the exact form that the stimulus measures will take is unclear. It could be a rate cut and or the restarting of the quantitative easing programme. What is clear is that doing nothing no longer appears to be an option.
| 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. |
The euro could come under pressure today as investors look towards the release of German trade balance figures for July and Euro investors’ confidence. Both are expected to have declined.
Dollar Drops On Weak Job Numbers
The dollar traded broadly lower on Friday following the release of the US labour department’s jobs report. The non-farm payroll report is the most closely watched US economic data print across the month. Whilst the data through the year has shown that the US labour market remains strong, signs of weakness are starting to creep in.
In August just 130,000 jobs were created in the US, that was well below the 160,000 that analysts had forecast. July’s headline figure was also revised lower. On the plus side, wages grew 3.2% year on year, whilst unemployment also remained steady at 3.7%.
Given the growing concern over the international backdrop and uncertainty on trade, firms are growing increasingly cautious about hiring. This was reflected in the payroll numbers and is not good news for the economy.
| 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. |
There is no high impacting US economic data today. Thursday’s inflation data will be the central focus for dollar investors this week.
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