If the US dollar is gold, the euro is silver. If the greenback didn’t exist, the euro would easily be the world’s most traded money and its reserve currency. 19 of the 27 European Union member states use the euro.
EUR/USD, affectionately known as fiber, is the most traded and liquid pair in the foreign exchange market, accounting for well over 80% of all daily transactions. The euro is a keenly-followed instrument by investors and financial media outlets alike.
As a fundamental analyst, a trader’s job is to study the underlying economic drivers behind a specific currency. With so many things to consider, it helps to find the most impactful indicators, three of which this article will cover in detail.
Basic fundamentals of the euro
What makes fundamentally analyzing the euro slightly trickier than another currency like the dollar is the size of the Eurozone. The Eurozone is the monetary union consisting of the 19 countries adopting the euro for trade purposes.
Thus, a fundamentalist is sometimes not studying one nation but rather a few. Economic reports from each of the states, specifically the Gross Domestic Product (GDP) and Consumer Price Index (CPI), can influence the direction of the currency.
Fortunately, most analysts agree Germany and Italy are the regions in the Eurozone whose economic activity has the most significant impact. Both account for close to half of the Eurozone’s Gross Domestic Product.
Germany is well known for having a highly developed economy, which is the highest in Europe and fourth-largest globally by nominal GDP. It is also the biggest capital exporter worldwide known for its vehicle, electronics, machinery, pharmaceutical, and chemical goods industries.
On the other hand, Italy is also a major player in exports of similar products, along with ships, luxury cars, and designer clothing. Unsurprisingly, the trade partnerships between the two regions are among the largest in the European Union.
The impactful EUR economic indicators
With all these considerations in mind, let’s look at the three most impactful economic indicators and what they mean for the euro.
For many fundamental analysts, the interest rate is the single most critical economic indicator for any country. Interest rates affect international investment, manage inflation, stabilize the financial landscape, and stimulate fiscal growth.
Central banks are responsible for dictating the monetary policies regarding this data, and any announcements made by these parties are highly anticipated and followed. In the case of the euro, traders watch out for the ECB (European Central Bank).
In every interest rate announcement, investors pay close attention to the open press question period, which can cause some volatility in the markets. The language used by the current President, Christine Lagarde, can be hawkish (suggesting an interest rate rise) or dovish (signifying an interest rate fall).
Like many developed countries from Europe, the ECB has employed a zero or near-zero interest rate policy for several years. This is done to make banks pay to store their excess funds at the central bank, consequently forcing them to lend out that money instead, stimulating the economy.
Nonetheless, we never know when there will be a change in the interest rate, and traders will know well in advance of the next announcement. As with most central banks, interest rate data is released about eight times a year.
The day is usually the first, second, third, or fourth Thursday of the selected month. The releases occur at 07:45 or 08:45 EST. A higher than expected reading is taken as a bullish sign, while a lower than expected reading is considered a bearish sign.
Gross Domestic Product
If the interest rate tells us about the monetary policy, then the GDP reflects the output of an economy almost from a business productivity standpoint.
The Gross Domestic Product measures the aggregate monetary value of all finished goods and services produced by a nation within a particular period, typically every three months.
Germany and Italy also have their own GDP figures that can also influence the currency valuation and give clues over the GDP of the Eurozone overall. The final Eurozone report reflects the percentage change from the previous quarter.
In recent years, Eurostat has published the preliminary and final GDP data at somewhat inconsistent dates. However, traders should still expect the ultimate result every three months with the preliminary figures preceding a month before.
Both reports are released at 05:00 or 06:00 EST on a chosen day. Fortunately, a look at the economic calendar in advance will alert traders of the exact publishing date and time.
Investors consider a greater percentage than anticipated as a positive sign, while a lower than expected figure is regarded as a negative sign for the euro.
Consumer price index
Inflation is an economic phenomenon affecting anyone using fiat currencies. If people in a country lose their purchasing power because of high inflation, their money will depreciate.
As with any forex market, one of the methods of measuring this metric is through the CPI. This index evaluates the changes in the value of goods and services paid by consumers monthly; it essentially looks at whether consumer prices are rising or falling.
Likewise, with the GDP, Germany and Italy have their individual CPI that could give clues over what the Eurozone’s CPI might be. A higher reading of the CPI for the Eurozone is a good sign and suggests bullishness for the euro.
Conversely, a lower than expected CPI result suggests bearishness for the currency. Eurostat compiles data for the index, and they release this information usually on the third or fourth Tuesday, Wednesday, or Thursday of the month at 06:00 EST.
A preliminary report precedes the actual results somewhere between two or three weeks prior and generally alerts traders of the eventual outcome.
One of the challenges with fundamental analysis is the myriad of economic indicators. Hence, this article should provide traders studying the EUR the blueprint in focusing on only the most impactful.
Regardless of the market one chooses to observe, this kind of analysis is effective, particularly when there are surprises between the forecasted and actual released numbers. Using this technique can give a skilled trader the heads-up on the euro and provide them a way to see the knock-on effects on other euro-based markets as well.