After trending lower on Tuesday, the euro US dollar exchange rate was rebounding in early trade on Wednesday. The pair struck a nadir of US$1.0941 before bouncing higher as investors focus on the US — China trade spat.
The euro lost ground in the previous session, even after better than forecast German industrial production figures. Data showed that German industrial production unexpectedly increased in August. The euro initially moved higher following the release as concerns over the health of the German economy eased. This was a bright spot after a recent slew of disappointing figures. However, German recession fears linger which ultimately pulled the euro lower.
There is no high impacting eurozone data due for release today. Instead euro investors will look ahead to the release tomorrow of minutes from the European Central Bank’s monetary policy meeting. This was the meeting in which they restarted the bond buying programme and cut overnight interest rates. Investors will scrutinise the minutes to gauge how much support the ECB is willing to give, or whether they will now turn to individual governments to pick up fiscal spending.
|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.|
Trade Talks & Fed Under Spotlight
The dollar gained ground in the previous session, even after Federal Reserve Chair Jerome Powell adopted a more pessimistic view of the economy. Jerome Powell acknowledged the softer data and said that the Fed is contemplating buying up more treasury bonds to support the financial system. This is negative for the dollar. Investors will now look towards the release of the minutes from the latest Fed meeting later for further clues.
Today investors are focused on the 13th round of trade negotiations which are due to start on Thursday in Washington. The rumour mill is in full swing and expectations of a trade deal are low. Before the talks even start Trump blacklisted 28 Chinese companies from the US. He has also announced visa limitations on Chinese officials involved in human rights violations in China’s Xinjiang province.
Whilst the US says that these moves are unrelated to the trade talks, they angered China who resent the US interference in internal matters. However, the most ominous sign is that Chinese officials could leave Washington a day earlier than originally planned. The US economy is showing signs of cooling as the trade dispute continues. Investors fear that the US economy will slow further if no US — Sino trade deal is reached soon.
|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.