After a weak start the euro US dollar is advancing on Thursday. The euro US dollar exchange rate spent early trade hovering around the flat line before rallying on positive ECB comments. The pair is trading at US$1.1150 at the time of writing.
Mario Draghi wrapped up his final European Central Bank monetary policy meeting by leaving policy untouched. Market participants widely expected the ECB to keep things on hold after cutting overnight interest rates and restarting its bond buying programme last month, following a 10-month break.
Mario Draghi confirmed that the ECB expects interest rates to remain at their present levels or lower until inflation starts to move back towards 2% target levels. However, optimism over an increased push for fiscal spending and Brexit helped lift the euro. Draghi said that the ECB now sees a reduced chance of a no deal Brexit. This lifted the euro because a no deal Brexit would also be damaging to eurozone economies and therefore drag on the euro.
The meeting came after the release of German pmi figures earlier today. The figures were dismal once again boosting expectations that Europe’s largest economy has tipped into recession. German manufacturing activity remained in contraction at 41.9 in October, marginally up from 41.7 in September. The level 50 separates expansion from contraction. The data shows that the export orientated country continues to struggle as global trade dries up.
Adding to recession fears, German service sector activity also missed analysts’ expectations.
US Durable Goods Disappoint
The dollar is out of favour on Thursday. After a quiet week US economic data releases ramp up today. US durable goods were significantly weaker than what analysts had pencilled in. Weak durable goods orders point to a nervous consumer. This is bad news for the US economy.
The weak data comes after softer existing home sales earlier in the week and following a series of gloomy numbers last week. With the US economy showing signs of slowing, investors are growing increasingly convinced that the Federal Reserve will cut interest rates at the monetary policy meeting next week.
| 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. |
Attention will now turn to manufacturing and service sector pmi data. Further signs of weakness could send 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 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. |
