The euro US dollar slumped to fresh two-year lows on overnight. The euro tanked to a nadir of US$1.0905. The pair has dropped 1% across the week.
The euro was under pressure in the previous session. Despite German consumer confidence unexpectedly rising for the first time this year, investors remain negative on the outlook for the German economy and the eurozone as a whole. Investors are increasingly convinced that Germany, Europe’s largest economy is heading into recession.
Euro investors also reacted to the resignation of known hawk and German European Central Bank executive Sabine Lautenschlaeger. Her resignation highlights the growing spilt in the ECB over its recent decision to ease monetary policy. When Sabine Lautenschlaeger leaves the ECB at the end of next month, the hawk/ dove split at the central bank will change. Investors will be watching closely to see who takes her place. A more dovish replacement could cement the idea that the ECB are intending to adopt an even more dovish stance towards policy.
| 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 there is no high impacting eurozone data. Instead investors could look towards second tier eurozone business confidence figures for further clues over the health of the bloc’s economy.
Dollar Mulls Over Impeachment Developments, GDP
The dollar rallied in the previous session as investors attempted to gauge whether President Trump would be impeached and after data showed that the US economy grew at 2% in the second quarter.
The final revision of the US GDP was as analysts forecast. On the one hand, this is a perfectly acceptable figure, which gave investors reason to cheer. On the other hand, the business investment element of the report was much weaker than analysts had anticipated. It declined by 1%, the biggest drop since 2015, which unnerved dollar investors.
Looking ahead the US dollar could see some volatility as analysts are predicting that US durable goods’ orders declined month on month in August by -1.2%. This would be well short of July’s 1.8% increase. US durable goods orders are closely watched because economists consider them to be a good gauge for consumer confidence.
On the other hand, analysts are also forecasting an up tick in PCE inflation, the Fed’s preferred measure of inflation to 1.8%. Higher inflation could discourage the Fed from any further rate cuts across the year, boosting 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. |
