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Thread: Factors affecting EUR/USD

  1. #1
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    Exclamation Factors affecting EUR/USD

    Factors affecting EUR/USD
    The Eurozone: The 12 countries that have adopted the Euro in order of GDP: Germany, France, Italy, Spain, the Netherlands, Belgium, Austria, Finland, Portugal, Ireland, Luxembourg and Greece.

    European Central Bank: Controls monetary policy for the Eurozone. The decision-making body is the Governing Council, which consists of the Executive Board and the governors of the national central banks. The Executive Board consists of the ECB President, Vice-President, and four other members.

    ECB Policy Targets: The primary objective of ECB is price stability consisting of two main "pillars" of monetary policy. The first one is the outlook for price developments and risks to price stability. Price stability is defined as an increase of the Harmonized Index of Consumer Prices (HICP) of below 2%. While the HICP is important, a broad number of indicators and forecasts are used to determine the medium-term threat to price stability. The second pillar is monetary growth as measured by M3. The ECB has a "reference value" of 4.5% annual growth for M3.
    The ECB holds a Council meeting every other Thursday to make announcements on interest rates. At each first meeting of the month, the ECB holds a press conference in which it gives its outlook on monetary policy and the economy as a whole.

    Interest Rates: The ECBs refinancing rate is the Banks key short-term interest rate used for managing liquidity. The difference between the refinancing rate and the US Fed Funds rate is a good indicator for the EUR/USD.

    Three-month Eurodeposit (Euribor): Eurodollar deposits are bank accounts deposited in a country other than the country of the currency; e.g. Japanese Yen accounts deposited outside Japan are called Euroyen. Similarly, euro-denominated accounts deposited outside the Eurozone are called "EuroEuros". The interest rate on three-month Euribor deposits held in banks outside the Eurozone. It serves as a valuable benchmark for determining interest rate differentials to help estimate exchange rates. Using a theoretical example on EUR/USD, the greater the interest rate differential in favor of the Euribor against the Eurodollar deposit, the more likely EUR/USD is to rise. Sometimes, this relation does not hold due to the confluence of other factors.

    Ten-Year Government Bonds: Another key factor of the EUR/USD exchange rate is the difference in interest rates between the US and the Eurozone. The German ten-year Bond is normally used as a benchmark. Since the rate on the ten-year Bond is below the US ten-year note, a spread narrowing (i.e. a rise in German yields or a fall in US yields, or both) is theoretically expected to favor the EUR/USD rate. A widening in the spread will act against the exchange rate. So the ten-year US-German spread is an important number to remember. The trend in this number is usually more significant than the absolute value. Naturally, the interest rate differential is usually related to the growth outlook of the US and the Eurozone, which is another fundamental factor of the exchange rate.

    Economic Data: The most important economic data comes from Germany, the largest economy, and from the euro-wide statistics still in their infancy. Key data are usually GDP, inflation (CPI and HICP), industrial production, and unemployment. From Germany in particular, a key piece of data is the IFO survey, which is a widely accepted indicator of business confidence. Also important are budget deficits of the separate countries, which according to the Stability and Growth Pact, must be kept below 3% of GDP. Countries also have targets for reducing their deficits further and failure to meet these targets will likely be detrimental to the Euro (as we observed Italys loosening of budget deficit guidelines).

    Cross Rate Effect: The EUR/USD exchange rate is sometimes impacted by movements in cross exchange rates (non-dollar exchange rates) such as EUR/JPY or EUR/JPY. For example, EUR/USD could fall as a result of significantly favorable news in Japan that filters through a falling EUR/JPY rate. On the contrary, USD/JPY may be declining, Euro weakness spills onto a falling EUR/USD.

    Three-Month Euro Futures Contract (Euribor): The contract reflects market expectations on three-month EuroEuro deposits (Euribor) into the future. The difference between futures contracts on the three-month cash Eurodollar and on the EuroEuro deposit is an essential variable in determining EUR/USD expected rate.

    Other Indicators: There is a strong negative correlation between EUR/USD and USD/CHF, reflecting a steadily similar relationship between the Euro and the Swiss Franc. This is because the Swiss economy is largely affected by the Eurozone economies. In most cases, a spike (dip) in EUR/USD is accompanied by a dip (spike) in EUR/CHF. The inverse also usually holds. This relationship sometimes fails to hold in the event of data or factors pertaining solely to either one of the currencies.

    Political Factors: Similar to all exchange rates, EUR/USD is susceptible to political instability such as a threat to coalition governments in France, Germany or Italy. Political or financial instability in Russia is also a red flag for EUR/USD because of the substantial amount of German investments in Russia.

  2. #2


    thank u for this nice subject it contains important information about EUR/USD

    thank u

  3. #3
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    The behavior of scalpers effect EUR/USD heavily, and scalpers are always easy to predict

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