Major Currency Profile: What to Know About The Euro
Mar 21, 2022
When trying to trade euro-based currency pairs, it is vital to follow any events that are related to or have a significant impact on the euro. While this may sound simple on paper, it really isn't. This is actually one of the biggest challenges faced by any FX (foreign exchange) traders, and it is one that needs to be overcome if any success is to be found with FX trading.
That said, the euro is currently the official currency of the 19 of 27 countries in the EU (European Union, forming the eurozone. Out of the eurozone, hundreds of economic reports come out each year, but to the FX trader, how does one know which report will be affecting the market the most?
Today, we want to share the events in the eurozone that can affect the price of the euro. Before we do that, let's talk more about what the euro is:
What is the Euro?
The euro is the official currency of the eurozone and several other European countries. It is used by around 330 million people regardless of their country of origin.
The euro was created based on the European Monetary Union (EMU), which was signed on March 7, 1999. EMU is a monetary union that was defined by the Maastricht Treaty, which united the European Union countries into a common monetary policy. The purpose of this union was to strengthen the global financial system and the stability of the world economy.
The euro has the same value in all participating countries and is the second-most used currency in the world (the first being the US Dollar).
The Economic Reports That Affect The Euro Value
Now that you know what the euro is, let's talk about the economic reports that can affect the value of the currency and, subsequently, the decisions made by FX traders.
1. Changes to the Monetary Policy of the ECB (European Central Bank)
The European Central Bank is the central bank for the eurozone, and its primary role is to be the lender of last resort, which means that it will always step in to provide liquidity to any bank that requires it, within the limits of its mandate.
The ECB implements monetary policy by setting the key interest rates for overnight loans, as well as for its main refinancing operations and for the payment system. It also conducts foreign exchange operations, maintains foreign-exchange reserves, and manages the Eurosystem credit operations.
The Governing Council of the ECB is the monetary policymaking body of Europe. The Governing Council is responsible for deciding the interest rates in the eurozone. Changes to interest rates will directly affect the value of the euro, and the monetary policy decision is typically made by a vote. The President of the ECB conducts the voting and announces the result. Usually, a decision is agreed upon by at least a two-thirds majority of the voting members of the Governing Council.
2. Socioeconomic and Political Events
There are times when the annual government budgets, unemployment rates, and GDP reports can be impacted by external socio-political events. For example, one of the most frequent updates on the eurozone is the employment data, which is released every month.
This data is very important to many traders who want to know whether the country's unemployment rate is still low and, if so, will this cause the currency to appreciate or depreciate.
When an external event is taking place, and it has a significant effect on the currency, traders will use technical forecasting tools to determine how these events will impact the price of the currency pair.
For example, if the unemployment rate in a certain country is higher than expected, this may also mean that the country will not be able to meet its budget deficit target. This may mean that the country will have to tighten its spending to avoid further debt, which could lead to a fall in the currency.
3. Inflation Reports
There are times when changes in inflation levels can also affect the price of the euro. For instance, if the inflation levels for a certain country are higher than expected, then the central bank will have to start raising interest rates in order to curtail inflation. This is because high inflation levels often lead to high-interest rates. Since higher interest rates raise borrowing costs in that country, this can have a negative effect on all other euro-based assets, such as stocks, bonds, and commodities.
Inflation data is also released on a monthly basis, which means that traders can use this data to determine whether the euro is going to appreciate or depreciate.
Let's take a look at the three different kinds of inflation reports that are released.
If the report shows that the inflation is higher than the target rate, then it will prompt the ECB to raise the interest rates. This can have a significant effect on the euro, as higher interest rates will make it more attractive to investors, and this may lead to an appreciation of the euro.
If the report shows that the inflation is lower than expected, then this may mean that there could be a rise in the unemployment rate. This is because if there is no inflation, then the interest rates will remain low, which will keep the unemployment rate high.
If the report shows that the inflation is outside the target rate, then this means the central bank will have to make a decision on whether to raise interest rates or not.
4. GDP (Gross Domestic Product)
The GDP (Gross Domestic Product) is one of the most important economic indicators, as it shows how well the economy of a country is performing. The GDP shows how much the country's economy has grown during a specified period, and it is shown as a percentage increase over the previous year.
The GDP is also important because it measures how well the country's economy is able to meet its debt obligations. This is because the GDP indicates how much income the country generates, thus giving a clear picture of the general health of the economy.
If the GDP report shows that the country's economy has failed to grow, then this will mean that the country will have more trouble in paying its debt obligations. In order to meet its debt obligations, the country will have to impose harsh austerity measures (such as higher taxes, lower spending, and higher interest rates), thus leading to lower economic growth in the future.
5. Confidence and Sentiment reports
A lot of people pay attention to the confidence and sentiment reports. While sentiment reports are not out of this world, they can still help traders to get a better picture of the future of the economy.
Sentiment and confidence reports are typically released by private organisations or companies, and they are a lot less detailed and in-depth than government reports. These reports are used to determine how consumer and investor confidence in a specific market is doing.
Keep in mind that, unlike the government reports, these reports are not very specific. This makes it hard to use these reports to get a good indication of the future of the euro. However, if the euro is going up and the other major currencies are falling, then this may indicate that there is more confidence in the euro. This can cause traders and investors to invest more in the euro. Of course, when the reports show a lack of confidence, the opposite effect may occur.
6. Current Account Balance
The current account balance is an important trade balance, as it reflects the value of the goods and services that a country is offering to the rest of the world.
When a country has a large current account balance, and it is trading in other countries' currency, then this may mean that there is going to be a run on that currency. If there is a run on a currency, then this can lead to a huge depreciation in the currency. This is because there is more demand for the currency, so investors will buy it because they think there is more value in that currency than others.
The current account balance is one of the most important indicators of a country's economic performance, and it is released every quarter.
7. News Reports
Some news reports can have a significant impact on the performance of the euro, but it only happens when there is a big story that is making headlines.
For example, if there is a big story that is causing the value of the euro to drop, then some traders may panic sell the currency. These investors may actually realize a lot of losses because they are selling at the wrong time, as the euro may continue to fall as long as the story is making news.
If there is a big story, and traders panic buy the currency, then this may indicate that there is a possibility that the currency could go up. The reason behind this is that traders will be buying the currency before it appreciates, without knowing if it is going to go up or not.
8. Economic Fundamentals
This is an extremely important indicator of the future of the euro, as it shows the strength of the eurozone.
The fundamental analysis is mainly used by longer-term traders, but some traders may use it to determine if the euro is going up or down. This is because fundamental analysis involves looking at the economic and political stability of a country to determine if the country is doing well or not.
For example, if the economy of a country is not doing well, then there is a possibility that the currency may appreciate. This is because investors will lose confidence in the country's economy, and they may also sell their assets and invest in other countries that have stable currencies.
On the other hand, if a country is doing well, then there is a possibility that the currency will depreciate. This is because traders will try to exchange their assets from the country that is doing well to the country that is not doing well in order to take advantage of the currency situation.
9. The Currency's Strength
Some traders may use the strength index to determine the future of the euro.
The currency's strength index is published by the Bank of International Settlement (BIS), and it is an important indicator. The currency's strength index determines the strength of the euro, as it is a quantitative measurement of the euro and its value. There are also other indices, such as the Big Mac Index, which can also be used to determine the future of the euro. For example, if the Big Mac Index is high, then the euro may appreciate, as the index is a measure of the euro's value.
The currency's strength index is a key market indicator, and it is made up of the value of the euro, the euro's exchange rate, and the change in the euro's exchange rate over a specific period.
The euro is one of the most important currencies in the world, and it is based on a basket currency system. This means that the value of the euro can change at any time, and it can also lead to a consistent rise or fall. The currency's fluctuations in value can also lead to sustained changes in its value, and this can be affected by different factors.
The factors that affect the value of the euro can be broad, and it can include a whole range of different information, such as central bank reports, economic reports, and news reports. Regardless, as an FX trader or an individual or business that deals with the euro often, using these reports to one's advantage is important.
By keeping yourself up to date with the latest news and information about the euro and what's going on in the eurozone, you can make the right decisions to protect your currencies to maintain the value of the assets you have. For FX traders, this information simply means that they can make sound decisions to ensure their trades are made in the best way possible!
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