The euro advanced versus the US dollar on Thursday. The euro US dollar exchange rate rallied to a high of US$1.1034 before edging lower to close at US$1.1011. The pair is just holding above $1.10 in early trade on Friday.
The euro gained in the previous session despite weak German export figures and following the release of the minutes from the September European Central Bank meeting.
The minutes showed that the ECB went ahead with restarting the bond buying programme despite objections from its own officials. This underscores the division that exists within the ECB over the central bank’s dovish stance. Given such a strong and vocal opposition to the bond buying programme, euro investors are hoping that the new ECB President Christine Lagarde will be less inclined to adopt such a dovish stance.
Today the euro is coming under pressure following lacklustre German inflation. Inflation in Europe’s largest economy remained flat at 0.9%. This is well below the 2% target and just the latest in mounting evidence that Germany is tipping into recession. Even though many ECB officials objected to the bond buying programme, continued weakness in Germany and the eurozone means they could be forced to ease policy further, regardless.
|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.|
US Inflation Holds At 7 Month Low
The dollar was broadly out of favour on Thursday following weaker inflation data and amid growing trade deal optimism.
US inflation remained steady at a 7-month low in September. Inflation, as measured by consumer price index (CPI) stayed at 1.7%, just shy of the 1.8% forecast by analysts. The weak figures support investors’ beliefs that the Federal Reserve will cut interest rates again in October.
The highly anticipated 13th round of US — China trade talks started in the previous session. Whilst hopes for a broad deal are low, optimism that a limited trade agreement could be achieved helped boost risk sentiment, pulling the dollar lower. President Trump has said that the talks are going very well. As geopolitical tensions ease, demand for the dollar and its safe haven properties decline.
Trade talk headlines will remain in focus today. Any signs of a deal could pull the dollar lower. US consumer confidence could also attract some attention.
|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.