Trade headlines and weak eurozone data pushed the euro US dollar exchange rate to finish Monday’s session 0.1% lower at US$1.0971. The pair has jumped northwards in early trade on Tuesday.
The euro was on the rise on Tuesday, as German industrial production unexpectedly rebounded in August. Industrial production in Europe’s largest economy grew 0.3% in August, beating analysts’ forecasts. The better than anticipated data has boosted hopes that the economic slowdown in Germany might not be as severe as initially feared.
Concerns over the health of the German economy have intensified over recent months as Brexit, the US — China trade dispute and slowing global demand have hurt the economy’s traditional strength: manufacturing.
Today’s improved data comes following dismal German factory order numbers on Monday and weak PMI figures last week. So, whilst it has helped lift sentiment, recession fears remain. A recession in Germany could quickly spill over into the rest of Europe. Under these circumstances the European Central Bank could have to cut interest rates further.
| 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 more eurozone data due to be released today. Investors will look ahead to German inflation figures, due on Friday, for more insight into the health of the German economy.
Fed Returns To Focus After Trade Dominated On Monday
With a quiet US economic calendar and US – Sino trade negotiations due to resume later this week, dollar investors focused on trade developments on Monday. Jumping from headline to headline the changing position of Beijing created some volatility in the greenback.
China has now said that it is ready to sign a trade deal on the specific points with which it agrees with the US on. Beijing has also said that it is not willing to discuss reforming its industrial policy or government subsidies. Whilst on the one hand, China being ready to sign a deal is good news for the US economy. The US — China trade dispute has hit the US manufacturing sector hard. However, the scope of that deal is now significantly narrower than market participants had hoped for, which is keeping pressure on the greenback.
Today the focus will return to the Federal Reserve as Fed Chair Jerome Powell is due to speak later on the subject of monetary policy. Investors will listen closely for further clues as to where the Fed is taking monetary policy.
| 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. |
