The European Central Bank (ECB) outlooks continue to dominate the euro U.S. dollar exchange rate. The euro lost ground versus the dollar, dropping 25 points from its high, to $1.1150 at the time of writing. The currency pair traded within a noticeably tight range throughout Thursday.
|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 received some important economic data for the first time this week. The ECB released the Economic Bulletin, which painted an economic outlook that was broadly in line with recent publications. The Bulletin highlighted that the eurozone economy continues to advance at a strong pace and is projected to tick up even faster than originally thought. However, the report also noted that economic expansion has yet to translate into higher consumer prices and inflationary pressures.
The inflation issue, or lack thereof, is creating some anxiety for euro traders. The ECB has noted they will keep interest rates frozen until inflation starts to tick up towards the central bank’s 2% target. Inflation so far has refused to budge, despite other economic indicators pointing to a solid economy. The fact that the ECB once more focussed on the lack of inflation dashed euro hopes of a rate rise. Central banks look to raise interest rates when inflation is high, therefore, low inflation environments tend not to encourage central banks to hike rates.
|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.|
Today sees more data for euro traders to digest, including the French GDP and eurozone preliminary service sector as well as manufacturing sector purchasing managers indices (pmi).
Squashed hopes of eurozone’s monetary policy being tightened through an interest rate rise was all the more noticeable against the dollar. Federal Reserve speakers have spent a good part of the week talking up interest rate hike possibilities in the United States. Speakers earlier in the week were very approving of another interest rate rise; however, two more recent talks have been more conservative about hiking again, highlighting instead the need for more strong data in order to be able to push ahead with further rises.
With this in mind, investors will be looking closely towards data today to see whether it supports the upbeat rhetoric of earlier Fed speakers or the more dovish stance from speakers later in the week. New home sales and preliminary service sector and manufacturing sector pmi’s are on today’s calendar.
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