The euro dropped sharply versus the US dollar in early trade following disappointing manufacturing figures from across the bloc. The euro US dollar exchange rate declined to a nadir of US$1.0965 and is now clawing back some of those losses.
The euro came under pressure on Monday after pmi figures showed that manufacturing activity fell in September to the lowest level in 7 years. The eurozone manufacturing pmi fell to 45.6 this month, down from 47 in August. This was significantly short of the 47.3 figure that analysts had pencilled in. 50 is the figure which separates expansion from contraction. The German pmi fell to 41.4 in September down from 43.5 in August. This was the worst German manufacturing pmi reading in a decade.
The dismal data from the eurozone and from Germany comes amid the ongoing US — Sino trade dispute and slowing global demand. Fears of a recession in Germany and across the eurozone as a whole are mounting and weighing on the value of the euro.
European Central Bank President Mario Draghi will speak this afternoon. Investors will be listening closely for further clues on monetary policy and whether today’s gloomy figures will encourage the ECB to cut rates further.
|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.|
Looking ahead to tomorrow, investors will remain glued to the eurozone economic calendar. IFO business sentiment data is due to be released. German business sentiment worsened in August as confidence hit a 7-year low. Further weakness could pull the euro lower.
Dollar Investors Eye US PMI’s
The dollar performed well across the previous week, even after the Federal Reserve cut interest rates by 0.25%. Market participants had been expecting the Fed to cut interest rates. However, investors had also been expecting the Fed to signal further rate cuts across the year, which it didn’t. The less dovish Fed boosted the dollar.
Today the dollar is once again advancing as investors look towards US data points. The US PMI reading is under the spotlight. Analysts are predicting that manufacturing activity will remain steady in September and that service sector activity will increase. If this is the case, the strong data could cause investors to push back further on rate cut expectations lifting the dollar.
|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.
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