Euro (EUR)



The Euro (EUR) is one of the two most exchanged currencies in the world. It is second only to the American Dollar (USD).

You probably know EUR is used in the Eurozone, which consists of 19 countries in the European Union.

In contrast to most other currencies (including the rest of the majors), which are issued and affected by a single country’s economy, EUR depends on the global economy of the Eurozone as a whole.

Some could think of it as the different states which make up the US, but European countries have more differences (cultural, linguistic, etc.).

Either way, this complicating matter need not be as complicated.

Let’s see what drives EUR price.

What Drives EUR Price?

As usual, let’s start with the two major shakers:

1.    Interest rate decisions by the ECB, the Central Bank of the Eurozone; and

2.    How the Eurozone’s economy is doing.

These two are usually interrelated since the ECB takes into consideration many factors before making interest rate decisions.

Most important of all?

Inflation.

Plain and simple.

Wait, but how do they measure inflation if we’re talking about 19 different countries (each with its own inflation?).

Glad you asked.

The ECB uses what’s called “Harmonized Index of Consumer Prices” or HICP.

You can check it out here.

This data is compiled by Eurostat, an agency (or Directorate-General) of the European Commission.

The Eurozone’s Monetary Policy is managed by the European Central Bank (ECB).

Ok, so we have a global inflation measure…

Now what?

Given the European Central Bank’s mandate, too strong (or too weak) inflation readings would make the Bank consider hiking (or lowering) rates.

Hikes (or cuts) drive EUR price like no other thing.

This is very similar to other currencies.

With the exception that the Eurozone’s diverse economy is more resilient to happenings in any one industry.

Blessed with natural resources, Canada, Australia, and New Zealand’s economies hinge on commodity exports, and so do their currencies.

Therefore, we do not see EUR going up or down based on the price of (say) commodities, like the CAD, NZD, and AUD do (these three are called commodity currencies for a reason).

Cool.

How do we use this to trade EUR pairs in FX?

Euro and Forex Markets

Since interest rates are what matter most…

And since the ECB is in charge of interest rates…

Also, given that the ECB cares first and foremost about price stability (positive, but low inflation)…

Inflation data is the single most market-moving data release for EUR (though, as we always say, this isn’t the case every single time).

Of course, we’re talking data releases, monetary policy decisions are far more powerful than data releases.

But when it comes to Eurozone data, inflation is important.

Don't get tired of this one, do we?

You can trade important deviations from expectations.

For example, if inflation is expected at 1.5 and it comes at 1.7, then it’s stronger than expected. The reverse is also true.

However, we can’t really simplify the art of trading to such rules of thumb.

Price can, and does go down on strong data (unless data really smashed it)

To give you a non EUR example:

The other day, Canadian GDP was expected at 0.2%

It came out at 0.6%, triple the expectations.

This was such a strong smash of expectations, CAD appreciated sharply right after the release.

Soaring GDP shows a soaring economy, which is “good” for its currency (attracts investors who demand said currency).

However, when you checked USD/CAD, the next session price had reverted back.

WTF?

That’s the thing, if you had been trading the pair, you would know it had hit rock-bottom recently (after a huge thousand pip nosedive following BoC’s hike).

Thus, GDP data made price go back to that rock-bottom price for a session.

And that was it.

But why didn’t price stay lower?

Because that data didn’t really change the Central Bank’s baseline.

In other words, trade data releases short term, unless they fundamentally change what a Central Bank will do.

As you can imagine, it’s hard to think any single data reading could make such a huge shift in paradigm, so it must be taken in context.

And that’s what you do with EUR.

Pay attention to what the ECB is up to, and trade data releases when they can shake things up.

Note: while its true that they use Eurozone data to inform their decisions, they (and the markets) also pay attention to France and Germany’s data more than that of other countries (you should know why those two).

Thus, if one of these two shows a strong data reading, markets can well react to this in favor (or against) EUR, but with lower volatility than a rate move.

See you soon,

Emil Christopher,

The Forex Economist

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