GBP/EUR: Euro Falls Ahead of ECB Decision

After dipping against the US dollar across the previous week, the Australian dollar is extending those losses  as the new week begins. The Australian dollar US dollar exchange rate declined to a low of US$0.6745 in early trade Monday.

The Australian dollar is under pressure after data from China showed that the Chinese manufacturing sector contracted for a fifth straight month in September. The Chinese manufacturing pmi printed at 49.8, whereby 50 separates expansion from contraction. The data shows the continued impact of the US — Sino trade dispute on the Chinese economy.

The health o the Chinese economy is important to Australian dollar investors, because the two economies are so closely linked. Market participants view the Australian dollar as a liquid proxy of China.

The Australian dollar could remain under pressure as investors look ahead to the Reserve Bank of Australia’s (RBA) monetary policy announcement tomorrow. The central bank is expected to cut interest rates by 0.25% to a new record low of 0.75%. The RBA last cut interest rates back in July, having already done so in June. Across those two months the bank shaved 0.5% off interest rates. Another rate cut could send the Aussie dollar lower.


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.


Dollar Stronger Ahead Of Busy Week For Data

The US dollar advanced across the previous week. The draw of the dollar had little to do with US economic data, which was OK if unremarkable. Instead investors looked towards the dollar for its safe haven properties as US House Speaker Nancy Pelosi announced a formal impeachment investigation into President Trump and as reports circulated that the Trump administration could move to limit investment in China.

Today the US dollar is extending gains from the previous week and investors are switching their attention to important data releases across the week. With US manufacturing and service sector figures, in addition to the closely watched US jobs report on Friday all due for release, investors will have a clearer picture as to the health of the US economy. Strong figures could calm fears that the Federal Reserve will cut rates again this year, boosting demand for 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 USD = 0.6784 AUD

Here, $1 is equivalent to approximately A$0.67. This specifically measures the US dollar’s worth against the Australian dollar. If the Aussie dollar amount increases in this pairing, it’s positive for the US dollar.

Or, if you were looking at it the other way around:

1 AUD = 1.4739 USD

In this example, A$1 is equivalent to approximately $1.47. This measures the Australian dollar’s worth versus the US Dollar. If the US dollar number gets larger, it’s good news for the Aussie dollar.

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