EUR/USD Steady Ahead of US Rate Decision

14.06.17
3 minute read
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The euro was keeping a buoyant tone, managing to remain above $1.12 as investors look cautiously ahead to the Federal Reserve interest rate decision later today.

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.

With little going on in the eurozone, investors are almost singularly focused on the two-day U.S. Federal Reserve monetary policy meeting this week. There could be a small reaction from the euro following the release of inflation data for Germany later this morning, but this is fairly unlikely to rock the boat much. Analysts are expecting the consumer price index to be 1.5%, still stubbornly below the European Central Bank’s target of 2% inflation.

A USD rate hike with a weaker outlook from the Federal Reserve?

On the other side of the equation, investors are so focused on the Federal Reserve monetary policy meeting, they’ve barely been able to react to any economic data coming out of America over the past few sessions. Analysts are forecasting a 1.25% increase in interest rates from the Federal Reserve on Wednesday as it concludes its two-day meeting. The expectation by the market of this rate hike occurring is almost 100%. Investors will also be scrutinizing how the Federal Reserve characterise the U.S. economy in light of the rather disappointing economic readings from the last few months.

A sluggish U.S. economy is showing signs of growth of just 1.2%, where hopes had been high that President Trump would spur levels of growth closer to 3% or even 4%, as he promised in his campaign. Jobs data has also been disappointing. The number of jobs created in May was just 138,000 against the 185,000 expected, whilst March and April also saw downward revisions.

This data and other data points are likely to weigh on the Federal Reserve outlook for interest rates going forward. This is because when an economy is showing signs of weakness, inflationary pressures decrease and central banks are less likely to hike interest rates. Data in the U.S. has been softening, so although the hike in June is almost 100% expected, the number of interest rate increases going forward is likely to be lower. Later today, should the Federal Reserve increase the interest rate but point to fewer hikes going forward, the dollar will likely come under pressure.

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. More local currency used then boosts the demand of that currency, pushing the value higher.
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