The euro is ticking higher on Friday following German sentiment data. The euro US dollar exchange rate is hovering above US$1.1100, up a marginal 0.1% on the day. Despite today’s gains, the pair is on track for a 0.5% loss across the week, snapping three consecutive weeks of gains.
The euro is putting a great distance between its price and weekly lows of US$1.0990 following a better than expected IFO business climate survey. The IFO business climate survey remained steady at 94.6 in October. This was above analysts’ expectations of 94.5. The German IFO President said that the German economy is stabilising. The institute also said that they expect Germany, Europe’s largest economy to expand in the fourth quarter.
This is some welcomed good news for euro investors following months a weak data. The German economic powerhouse contracted in the second quarter and many analysts expect Germany to have contracted again in the third quarter. The exporter nation has been hit by slowing global demand and business uncertainty amid the ongoing US — China trade dispute and Brexit.
Weakness in the bloc has already caused the European Central Bank to ease monetary policy in its September meeting. Fears had been growing that the central bank would be forced to cut rates again. Today’s IFO survey will have eased those fears, at least slightly, boosting the euro.
There is no more euro data due today.
|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 Steady Ahead Of Consumer Confidence Figures
The dollar is trading broadly flat versus its peers on the final day of the trading week, consolidating gains from Thursday. Investors cheered data which indicated that the US manufacturing sector was starting to stabilise. The US manufacturing flash pmi improved for a second straight month after falling in recent months. The US manufacturing sector was slumping as Trump’s America First policy contributed to slowing global growth and demand.
Investors will now look towards US consumer confidence figures. So far, the US consumer has remained relatively resilient during the manufacturing slump. That said recent retail sales were surprisingly weak prompting fears over the health of the US consumer. Analysts are forecasting consumer confidence will remain steady in October. Should it fall the dollar could drop.
|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.|
|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.