The euro slipped versus the dollar in the previous session, closing Monday down 0.4%. The pair is extending those gains in early trade on Tuesday, hitting fresh two-year lows at US$1.0879.
The euro skidded lower in the previous session after German inflation data disappointed investors. German prices increased just 0.9% compared to a year earlier in September. This was below the 15 increase that analysts had pencilled in. German inflation has declined for three consecutive months and is now 5 months below the target 2% level. The figures are fanning concerns that the German economy is slowing and will tip into recession in the third quarter.
Today investors will look to eurozone inflation figures. Analysts are forecasting that headline inflation will remain steady in September at a rather lacklustre 1%. They predict that core inflation will tick higher to 1% from 0.9%.
Such weak inflation figures support the European Central Bank’s recent move to ease monetary policy. Earlier this month the central bank restarted its bond buying programme and cut the overnight deposit rate to get more money circulating around the financial system. Signs that inflation continues to weaken could boost investor expectation of further monetary easing and drag the euro 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. |
US Manufacturing Data To Boost Dollar?
The dollar remained firm in the previous session versus its peers. Whilst data from US recently hasn’t been amazing, it has been OK. In other words, the US economy has shown resilience in the face of the ongoing US — Sino trade war and economic slowdown engulfing the rest of the world.
The dollar is also being supported because the Federal Reserve is refusing to cut interest rates further, whilst the domestic economy remains resilient.
Investors will now look ahead to US manufacturing data later today. The weakest link in the US economy right now is the manufacturing sector, which contracted in August. Analysts are expecting that manufacturing activity picked up again in September, with the sector expanding in September. A strong reading could send the dollar higher as investors push back further on the prospects of a rate cut by the Federal Reserve.
| 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. |
