The euro is recovering from fresh two-year lows hit earlier today. The euro US dollar exchange rate dropped to a low of US$1.0879, the weakest level since May 2017, before rebounding after US data disappointed investors. The pair has now pushed back through US$1.0900.
The euro was under pressure in early trade, after data showed that inflation in the eurozone continued to slide further from the European Central Bank’s 2% target. Eurozone prices increased just 0.9% year on year, below the 1% analysts had forecast. Inflation in the bloc is at the weakest level in 3 years.
The lacklustre inflation in the eurozone highlights why the European Central Bank (ECB) eased monetary policy. The ECB lowered interest rates and restarted its bond buying programme last month. It is still too soon to see the effects of the ECB’s move in macroeconomic data. For now, the central bank will be in a wait and see mode, to see whether the easing of policy boosts inflation levels. Should the weak data continue coming, investors will assume that the central bank will look to cut rates again, this could pull 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.|
There is no high impacting data due for release today or tomorrow. Instead the euro will trade at the will of the dollar.
Dollar Declines As Manufacturing Output Hits Decade Low
The US dollar had been in favour across the past few weeks amid reasonably strong economic data. However, the US dollar is now falling across the board after data showed that output in the US manufacturing sector unexpectedly contracted further. The manufacturing pmi was just 47.8 in September. This was well below analysts’ expectations and the weakest reading in a decade. Any reading below 50 indicates a contraction.
The deeper contraction in the US manufacturing sector is a sign that the ongoing US — China trade dispute is taking its toll on the US economy and continues to weigh on business confidence. With no end in sight to the trade war, the outlook for the US manufacturing sector is gloomy and this is unnerving investors. So far, the slump in the manufacturing sector hasn’t spilled over into the dominant service sector. Investors will now look ahead to Thursday’s service sector for confirmation of this.
|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.|
|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.