The euro initially sunk versus the dollar following the ECB announcement, before performing a spectacular U-turn. The pair dropped to a low of US$1.0927 before closing the session 0.4% high at US$1.1056. The pair continues to advance 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.
In the previous session, the European Central Bank announced its largest rate cut and stimulus package in three years. The central bank kept the main lending rate at 0%. However, the bank cut the overnight deposit rate by 0.1% to -0.5%. This means that the ECB charges banks more for keeping deposits with the central bank. This aim of this move is to get money out of the banks and into the hand of consumer through lending.
In addition to cutting the overnight deposit rate, Mario Draghi, President of the ECB announced that the bank will be restarting its quantitative easing programme, buying up debt in the region of €20 billion per month. Whilst this is slightly short of the €30 billion than analysts were forecasting, it has no end date. In other words, the ECB will restart the bond buying programme indefinitely. Combined these measures ensure there is more money swirling around the eurozone. As result, the euro initially fell.
The euro recovered because in addition to the stimulus measures announced, the ECB is upping pressure on individual governments to increase fiscal spending. This would create inflationary pressures and lift the euro.
Today investors will continue digesting the ECB’s decision. Investor could also briefly look at Eurozone trade figures.
Dollar Dips As Investors Expect Fed To Cut
The dollar declined in the previous session despite data showing that US core inflation increased. US inflation, as measured by the consumer price index ticked lower to 1.7% year on year. However, core inflation, which excludes more volatile items such as food and fuel increased solidly in August, leading to the largest annual gain in a year.
The strong reading comes ahead of the US Federal Reserve monetary policy meeting next week. Analysts do not expect the strong core inflation figure to deter the Fed from cutting interest rates.
|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 investors will look towards the release of US retail sales and consumer confidence. A weak print could pull the dollar lower.
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