Brexit deal news sent the euro marching higher versus the US dollar on Thursday. The pair rallied to an almost two month high of high of US$1.1139, before easing slightly.
The euro advanced on news that the UK and EU had agreed a Brexit deal. After days of intense negotiations, British Prime Minister Boris Johnson and European Commission President Jean Claude Juncker tweeted simultaneously that an agreement had been reached.
The pound was the biggest gainer on the news. However, the euro came in second. This is because a Brexit deal would also reduce uncertainty and risk for eurozone economies.
This is by no means the end of the Brexit path; volatility will continue. Boris Johnson must now get the deal through Parliament, a challenge that his predecessor Theresa May failed at several times. The Northern Irish DUP party have already said that they will not support the deal. The leader of the opposition, Jeremy Corbyn, has said that it is a worse deal than Theresa May’s, which was overwhelmingly rejected. As investors analyse the probability of the Brexit deal making it through Parliament, the euro slipped off session highs.
With no eurozone economic data to look towards, euro investors will remain fixed on Brexit developments and the EU Summit.
Will US Manufacturing & Industrial Production Drag Dollar Lower?
The dollar extended losses for a third straight session as China trade related headlines have died down and investors continue to digest dismal US retail sales released on Wednesday.
The first decline in retail sales in 7 months unnerved investors. The US consumer spending is a central pillar to the US economy. Signs of spending slowing could suggest that the US is heading towards an economic slowdown,
Investors will now turn their attention to US manufacturing and industrial production data this afternoon. Analyst expect both data releases to show a decline month on month. The weak figures could further fuel slowdown fears. Should the economy heading towards recession, the Federal Reserve will be more likely to cut interest rates for a third time year. In this scenario, the prospect of additional monetary policy easing could send the dollar lower.
| 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. |
| 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. |
