Pound Drops vs. Euro on Brexit Fears & Weak Manufacturing Data

The Australian dollar closed 0.1% lower versus the US dollar on Wednesday. The Aussie US dollar exchange rate is extending those losses for a third straight day on Thursday. The pair dipped to a low of US$0.6825.

The Australian dollar declined following a mixed bag of data. Australian manufacturing pmi managed to keep in expansionary territory for another month, at 50.1 in October. Whilst this was down slightly from September’s 50.3, it was well above the contraction that analysts were expecting. Meanwhile, the service sector flash pmi dropped by more than what analyses had been forecasting to 50.8, significantly below the 52.2 that was expected. Business confidence also slipped as the pace at which firms took on new staff stagnated. As Australian dollar investors focused on concerns over the health of the service sector. The weak data pulled the dollar lower.


Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.


Given the lack of high impacting Australian economic data, Aussie dollar investors will focus on trade headlines. In the case of the US — Sino trade dispute both US and China are trying to portray a rosy picture with regard to effort and the likelihood of a trade deal. However, the lack of tangible results is unnerving investors.

US Data Galore

After a bare US economic calendar at the start of the week, things will pick up today. US dollar investors will focus on durable goods and PMI figures out later. The manufacturing pmi will be of particular interest. Analysts forecast that the manufacturing pmi will remain in expansion, but only just. The flash manufacturing pmi is expected to fall to 50.7 in October, down from 51.1 the previous month. 50 separates expansion from contraction. Market participants are concerned over the impact of the ongoing US — Sino trade dispute on the US manufacturing sector, which had slumped heavily across recent months

Analysts are expecting the service sector pmi to have increased marginally to 51 in October, up from 50.9. A weak reading could fuel concerns that the manufacturing slump is spreading to other areas of the economy. Given the dominance of the US service sector, a downbeat reading could drag the US dollar sharply 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 USD = 0.6784 AUD

Here, $1 is equivalent to approximately A$0.67. This specifically measures the US dollar’s worth against the Australian dollar. If the Aussie dollar amount increases in this pairing, it’s positive for the US dollar.

Or, if you were looking at it the other way around:

1 AUD = 1.4739 USD

In this example, A$1 is equivalent to approximately $1.47. This measures the Australian dollar’s worth versus the US Dollar. If the US dollar number gets larger, it’s good news for the Aussie dollar.


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