The euro US dollar exchange rate slumped below the key US$1.10 level in early trade on Monday and remained there for the rest of the session. The pair continues below this level in early trade on Tuesday.
The euro was under pressure at the start of the week after German and eurozone PMI figures made for grim reading. There was a sense that the figures couldn’t get much worse. The data showed that the German manufacturing sector slipped deeper into contraction in September. Whilst the sector has been on a steady downtrend for many months, analysts had been expecting a slight uptick in manufacturing activity. The PMI printed at a disappointing 41.4, significantly below the 44.6 that analysts had pencilled in. This was the worst reading in over a decade.
Manufacturing in the eurozone was equally gloomy, contracting at the fastest pace in 7 years. The slowdown in the manufacturing sectors comes amid the ongoing US — Sino trade dispute, which is hitting confidence worldwide and slowing global demand. Concerns are growing that Germany and the Eurozone are heading into a recession.
Today investor will turn towards IFO German business sentiment data for further clues over the outlook for the German economy. German business confidence has been deteriorating across recent months, hitting a 7-year low in August. The euro could come under further pressure if sentiment continues to decline.
|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.|
US Dollar Supported By Risk Aversion
Investors favoured the US dollar in the previous session as risk aversion increased and following better than expected US manufacturing data.
Dollar investors have now moved on from the Federal Reserve rate cut last week. Attention has switched back to the US — Sino trade dispute, trade talks and the impact that the ongoing dispute is having on the global economy.
With little progress reported from trade talks uncertainty is once again picking up. Dismal manufacturing data from Germany and the eurozone as a whole also unnerved investors. The US dollar is the reserve currency of the world. Therefore, when geopolitical concerns increase, or fears over the health of the global economy rise, then investors often look to buy into the dollar for its safe haven status.
Moving forward dollar investors will focus on US consumer confidence figures later today. The US consumer has remained resilient despite US manufacturing experiencing a slump in recent months. Investors will want to see that US consumers remain confident. When consumers are happy about their future prospects and those of the economy, they tend to spend more. This is good news for the economy and creates inflationary pressures.
|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.