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EUR/USD: Dollar Drops As Trade Talk Fears Rise

7th October 2019

After slipping to a low of US$1.0962 in early trade, the euro US dollar exchange rate is rebounding. The pair has clawed back earlier losses and is extending gains towards US$1.10.

The euro dropped sharply lower in early trade after a slew of downbeat data heightened concerns over the health of the eurozone economy. Firstly, German factory orders dropped by a more than forecast -0.6% month on month in August. On an annual basis orders are down a staggering -6.7%. Orders have fallen for the past 15 months as the US — Sino trade dispute knocks business confidence and global demand.

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.

Secondly the euro area Sentix investor confidence reading fell to the lowest level since April 2013. The results of this survey suggest that the action taken by the European Central Bank (ECB) to ease monetary policy in an attempt to shore up the economy is failing to lift investor confidence in the region.

Fears of a recession are growing. What started out as a manufacturing slump in Germany has pushed the country almost certainly into recession and fears are growing that momentum will spread the weakness across the eurozone. The action by the central bank has not managed to put a spark back into the economy. The general downbeat outlook could prevent the euro from moving much higher.

US — Sino Trade Talks Destined To Fail?

With little to digest on the data front the dollar is being pushed lower by concerns over trade negotiations, which are due to begin again this week, in Washington.

Reports that trade negotiations between the US and China have hit trouble unnerved the financial markets. With China reluctant to agree to a broad, far reaching trade deal with Washington, the scope of the US — Sino trade talks has narrowed considerably. Reports suggest that China will now attempt to drive a harder bargain given that Trump’s need for a deal is becoming more urgent in view of the economic slowdown in the US. As trade pessimism increased, investors initially brought into the dollar for its safe haven status. However, fears over how failure to reach a deal could negatively impact the US economy are now driving the dollar lower.

With no high impacting US data due for release today, investors will continue digesting trade headlines and look towards the release of the Federal Reserve minutes on Wednesday for further clues as to the next steps of the central bank.

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.