GBP/USD: Dollar Jumps vs Pound Amidst US - China Trade War

The euro US dollar exchange rate ended the session on Wednesday up 0.1% at US$1.0985. The euro is extending gains in early trade on Thursday, breaking above US$1.10 on US – China deal trade hopes.

The euro advanced in the previous session, despite no economic releases. With trade headlines dominating, the euro was trading at the will of the dollar.

Today the euro is extending those gains, even after data showed that the German trade balance decreased in August, with exports shrinking by -1.8% month on month. The data reinforces investor expectations that the manufacturing slump is pushing Europe’s largest economy into recession.

Euro investors will now look ahead to the release of the minutes from the September European Central Bank (ECB) monetary policy meeting. At this meeting the ECB decided to cut the overnight interest rate and restart its quantitative easing programme.  Investors will dissect the minutes to assess how much more support the ECB is willing to give to shore up the eurozone economy, or whether they consider that easing monetary policy is increasingly less effective and that fiscal stimulus by individual counties could be a more effective measure to stimulate 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.

 

Trade Talks & US Inflation In Focus

The dollar traded broadly flat versus its peers in the previous session as investors digested US — Sino trade talk developments and the minutes from the September Federal Reserve monetary policy meeting, the FOMC.

There were not great surprises in the minutes from the September meeting. The minutes showed that most policy makers were in favour of a second interest rate cut this year. They also showed that most policy makers were more concerned about risks relating to trade tensions, geopolitics and slowing global growth rather than concerns over the health of the US economy itself. The dollar’s reaction was muted.

Trade is back in focus today. Investors are growing in confidence that the two powers, China and US,  will be able to hammer out a deal when they meet for the 13th round of trade talks in Washington today. Reports of a currency pact, no new tariffs and other agreements are boosting sentiment in the financial markets. As a result, the dollar is dropping lower as investors are no longer seeking its safe haven properties.

The dollar could find some support later with the release of US inflation figures. Analysts are forecasting an uptick to 1.8% from 1.7%.

 

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.

 

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