EUR/USD Euro Boosted by Macron's Success; US Fed Reserve Now in Focus

13.06.17
4 minute read
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The euro U.S. dollar exchange rate is trading steady around $1.12, after edging up from last week’s low of $1.1160.

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.

The euro has been gaining strength as investors cheer the success of President Macron’s party in the French Parliamentary elections. Shortly after Macron won the Presidential election there had been concerns that Macron’s *En Marche! party would struggle to find the support needed in Parliament to rule comfortably. However, the party, which was only formed a year ago, managed to win a massive 32.32% in the first round. Some analysts anticipate that En Marche! could even take up to 455 of the 577 seats in the National Assembly in the second round.

The overriding benefit for the euro is that with a large majority Macron should easily be able to push his political and economic agendas through Parliament. Macron’s political agenda is pro-European Union, essentially looking to strengthen and unify the eurozone. In addition, his economic agenda is also decidedly pro-business as he’s expected to overhaul labour laws in order to inject life back into the weak economy. A stronger economy and more stable political environment attracts more foreign investment. To invest in the region one needs euros, and the increased demand for euros boosts its value. Both agendas are, therefore, euro positive.

Eurozone economic data on Monday had little impact on the value of the euro. Tuesday is once again a quiet day as far as eurozone economic data is concerned.

U.S. dollar steady ahead of Fed Reserve rate decision on Wednesday

The U.S. dollar has had a fairly quiet start to the week as investors look cautiously ahead to the Federal Reserve interest rate decision on Wednesday. Influential economic data has been in short supply and fired FBI Director James Comey’s appearance before Congress last Friday didn’t offer any new developments. Consequently, concerns have faded over Trump’s support in Congress and the President’s ability to push through his dollar boosting agenda.

Dollar traders are looking anxiously ahead to Wednesday when the U.S. Federal Reserve is expected to increase interest rates by 0.25%. The Fed is also expected to indicate how many more times they intend to raise rates through the rest of 2017. Given that the rate hike in June is almost guaranteed in the eyes of the market, the outlook for rate rises has the biggest potential to drive the value of the dollar. Should the Fed point towards two or more hikes in the rest of 2017, the buck could receive a boost. Conversely, should the Fed hint to no more rises, then the dollar could be set to fall.

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.

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