The euro was advancing against the US dollar on Tuesday. The euro US dollar exchange rate is looking to push through US$1.10.
The euro was in favour in early trade on Tuesday as data helped ease concerns over the health of the German economy, if only slightly. Data showed that German industrial production unexpectedly increased in August, growing 0.3%. Analysts had been forecasting a decline of -0.1%.
The surprise improvement provided a glimmer of hope that the slowdown in the German economy may not be as severe as initially thought. Data from Germany has been particularly downbeat over recent weeks with the manufacturing PMI and German factory order data pointing to a deep contraction in the exporter nations’ manufacturing sector. Whilst the brighter figures are helping the euro higher, recession fears still linger keeping gains in the euro capped.
A recession in Germany, Europe’s largest economy, could quickly cause slowing momentum and potentially a contraction in the eurozone as a whole. Under these circumstances the European Central Bank could be forced to cut interest rates further, in an attempt to boost the economy.
| 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 further eurozone economic data due for release today. Investors will now look ahead to Friday’s German inflation data for further clues as to the health of the German economy.
Fed Chair Powell To Provide Direction?
The US dollar was under pressure as US economic slowdown fears picked up. Data showed that US small business sentiment dropped to near the lowest level of Trump’s presidency. The National Federation of Independent Business optimism index declined 1.3 points to 101.8 in September, the third decline in just four months.
The data adds to evidence that the US economic is cooling, although not yet sliding into a recession. Data last week showed that the manufacturing and service sectors were weaker than what analysts had forecast and job creation was also on the softer side.
Investors will now look ahead to a speech by Federal Reserve Chair Jerome Powell on monetary policy. Investors will be watching carefully for any signs that the Fed could adopt a more dovish stance in the wake the cooling economic growth.
| 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. |
