The euro has been struggling against the U.S. dollar following the U.S. Federal Reserve’s interest rate hike and upbeat outlook for their economy earlier in the week. The euro U.S dollar exchange rate fell to a low for the euro of $1.1132, on both euro weakness and dollar strength, before stabilising at $1.1150.
|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.
Euro investors were feeling uninspired following slightly weaker than expected inflation data from France. Whilst this in itself is not a high impacting event, it has created jitters in the market ahead of the eurozone inflation reading today. Economic data for the eurozone has been encouraging since the start of the year; the eurozone economy is growing and strengthening. However, inflation is refusing to budge from its low levels. The European Central Bank President, Mario Draghi, has made it perfectly clear that there must be an uptick inflation towards the central bank’s target level of 2% before monetary policy tightening will be considered.
Low inflation levels lead to low interest rate expectations.In turn, low interest rate expectations lead to lower values for a currency. However, should eurozone inflation levels print above the 1.4% that analysts are anticipating, then the euro could receive a boost. Higher inflation will increase hopes of monetary policy tightening and an interest rate hike increase.
|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.|
The dollar has climbed to a two-week high versus the euro after a string of stronger than forecasted data and an interest rate hike by the U.S. Federal Reserve. Earlier in the week, the U.S central bank increased interest rates in a widely expected move from 1% to 1.25%. The Fed also gave an optimistic outlook for the U.S. economy, opting to push aside weak inflation data released hours before the rate decision. The positive outlook has served to increase interest rate expectations going forwards, which is why the dollar has moved higher. In coming months, both investors and the Federal Reserve alike will be watching inflation figures even more closely than normal to gauge when the next hike could be.
Economic data since the conclusion of the U.S. monetary policy meeting has offered further supported the Federal Reserve’s optimistic statement. Initial jobless claims declined by 8,000 claimants when Bloomberg analysts were forecasting a decline of just 3,000. Today, investors will be watching U.S. house starts and building permits to see if the data can continue surprising on the upside.
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