The euro U.S. dollar exchange rate dropped over 0.7% during the course of last week and is starting the new week at $1.1200. European central bank action and U.S. politics formed the highlights last week. This week, in a role reversal, movement will be dominated by U.S. central bank action and European politics both.
|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.|
Last week the European Central Bank (ECB) met analysts’ expectations by keeping the interest rate decision on hold. The central bank also removed any reference to further rate cuts, although the ECB President also warned over the stubbornly low level of inflation in the region. This warning served to lower interest rate hike expectations and kept the euro in check..
|Why do raised interest rates boost 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. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. So more local currency used then boosts the demand of that currency, pushing its value higher.|
With the ECB interest rate meeting firmly in the rear view mirror, politics will return to the spotlight in the form of French Parliamentary elections. The first round takes place today, with the second round voting on 18th June. Newly elected French President Macron’s fledgling party is widely expected to do well in the Parliamentary elections thanks to a change in the French system, brought about in 2014. Should this prove to be the case, then the euro could receive a boost.
Why? Should Macron secure a solid number of seats in these elections, then he will have the support of Parliament to push through his pro-European Union (EU) political agenda. Any pro-EU agenda is euro positive as it pushes the possibility of a break-up of the bloc or the single currency further into the distance.
Meanwhile, the U.S. dollar moved higher last week as the impeachment cloud hanging over President Trump was partially shaken off. Fired FBI Director James Comey provided no new major information in his testimony before Congress and the lack of evidence boosted the buck, although the political cloud has not completely blown away.
Whilst political risk drove the dollar last week, economic data and interest rate expectations will drive movement this week. Wednesday is set to be the big day with U.S. inflation data, retail sales data and the Federal Reserve interest rate decision all expected. It’s anticipated that the U.S. central bank will hike rates by 0.25% and even though there is a 95.8% probability of the hike, it could still provide a boost to the buck.
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