The euro remained evenly matched with the US dollar across the session on Tuesday. Both currencies lacked relevant data releases. As a result, both the Euro and the US dollar experienced a lacklustre session. The pair closed flat at US$1.1049. The euro is advancing 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 previous session was a relatively quiet session for the euro. With no economic data to focus on, investors were looking ahead to tomorrow’s European Central Bank (ECB) monetary policy announcement.
Given the recent slew of dismal data from Germany and signs of weakness in the eurozone economy, market participants broadly expect the ECB to dole out fresh monetary stimulus in the form of a rate cut. They also expect the central bank to restart the quantitative easing programme from October, also to be announced following the meeting tomorrow.
|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.|
However more recently ECB policy makers including France’s central bank President Villeroy and Estonia’s central bank President Muller hve cast doubt over the size of the stimulus package. Should the package disappoint investors in terms of size or scale then the euro could in fact advance.
Will US Factory Level Inflation Drag Dollar Lower?
The dollar experienced a dull session on Tuesday. With no relevant data and no fresh news on US — China trade dispute talks, the dollar bumbled along. Not even President Trump firing National Security Adviser John Bolton provoked a move in the green back.
Today there is no high impacting US data due. Producer Price Index, PPI, or inflation at factory level could attract the attention of investors. Economists consider PPI an important indication of future consumer inflation. Therefore, a weak reading could give the dollar lower by raising fears over the health of the US economy.
|Why does poor economic data drag on a country’s currency?|
|Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.|
Following Friday’s weak US non-farm payroll, fears have grown that the negative impact of the US — Sino trade dispute is seeping through the US economy. Analysts are forecasting a 0.1% increase month on month for PPI.
The most important release of the week for the U dollar will be Thursday’s consumer inflation figures. Analysts are forecasting a 1.7% increase year on year in inflation. This is below the 2% target set by the Federal Reserve. Weak inflation means a rate cut is more likely.
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