The euro US dollar exchange rate recovered from a low of US$1.1105, to push back to US$1.1130 in a rather dull session o n Wednesday. The pair is advancing is advancing in early trade on Thursday.
The euro traded flat despite disappointing eurozone consumer sentiment data. Consumer sentiment in the bloc dropped from -6.5 in August to -7.6 in September, the lowest level this year. Euro investors broadly shrugged off the disappointing figures; figures which show that the slump in manufacturing could be slipping over into the consumer sector. A consumer who is less confident in the outlook will often spend less. This is bad news for the eurozone economy and its lacklustre inflation.
Given the deteriorating household sentiment investors will look closely at PMI data due to be released today. Analysts expect activity in the service sector and the manufacturing sector to have ticked higher in October, suggesting that the slow down is starting to bottom out.
The European Central Bank monetary policy announcement is due today. This will be the last ECB meeting with Mario Draghi at the helm. The ECB cut overnight interest rates and restarted its quantitative easing programme last month. Analysis are not expecting any action from the ECB this month. That said, investors will still be listening closely for any signs that the central bank is turning more dovish.
| 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. |
Dollar Investors Prepare For Slew Of Data
The dollar has had a quiet week so far. Trade headlines have been mixed and have not rocked the boat too far in either direction.
The US economic calendar has been sparse for the first half of this week. However, that is set to change today. Investors will have a barrage of US data to digest, including US durable goods and US PMI figures.
Analysts are forecasting a mixed bag from the data. The manufacturing sector is expected to show stagnation. However, the service sector could produce more upbeat numbers.
Investors will be paying close attention to the data as soft stats across the previous week lifted investor expectations of a rate cut. Investors are pricing in a 93.5% probability of rate cut in October.
| 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. |
