Factors affecting the EURUSD exchange rate

Eurozone - 12 countries that use the euro in calculating gross national product: Germany, France, Italy, Spain, the Netherlands, Belgium, Austria, Finland, Portugal, Ireland, Luxembourg and Greece.

European Central Bank (ECB)

Supervises the monetary policy of the Eurozone. The decision-making body is the Governing Council, which consists of the Board and the national central bank governors. The Board consists of the President ECB, Vice President, and four other members.

Policy objectives of the European Central Bank

The ECB's main goal - price stability. There are two main "pillars" of monetary policy here. The first is the prospect of price events and the risks of price stability. Price stability is defined as holding the Harmonized Consumer Price Index (Harmonized Index of Consumer Prices - HICP) at a level of no more than 2%. The second is. monetary growth, measured by M3. The ECB recommends an annual growth of 4.5 % for M3.

ECB Council meets every second Thursday of the month to announce interest rates. When meeting for the first time each month, the ECB holds a press conference in which it gives a perspective on monetary policy and the economy in general.

Eurozone interest rates

ECB refinancing rate - the key bank short-term interest rate used for liquidity management. The difference between the ECB refinancing rate and the U.S. Funds rate is a good indicator for movements EUR/USD currency pair.

3-month Eurodeposit (Euribor)

Interest rate on 3-month Euribori.e. a deposit placed with banks outside the Eurozone serves as a valuable benchmark for determining the interest rate differential to help assess exchange rates. As a theoretical example for EUR/USD - a large interest rate differential in favor of euribor vs. EUR/USD. Sometimes, this attitude does not work because of the influence of other factors.

10-Year Government Obligations (Bonds)

Another important factor in the EUR/USD exchange rate is the difference in interest rates between the U.S. and the Eurozone. The German 10-year Bund is usually used as a benchmark. Since 10-year Bund rate below U.S. 10-year Treasury notes, the narrowing of the spread (i.e., an increase in German or a decrease in U.S. securities) is expected to benefit EUR/USD.

The widening of the spread will work against the rate. So, the 10-year US-German spread works quite confidently. Trend in this case is usually more important than absolute values. Interest rate differentials naturally correlate with the growth prospects of the U.S. and the eurozone.

Economic macro data

The most important economic data for the region comes from Germany, the largest economy. The key data are usually Gross National Product (GNP), inflation (CPI and HICP), industrial production and unemployment. In Germany, in particular, the key part of the data is displayed in the survey IFOwhich is a widely used indicator of business activity. Also important are individual country budget deficits, which, according to the Treaty on Growth and Stability, must remain below 3% of gross national product. Countries also have targets to further reduce their deficits, and the difficulty of meeting those targets is likely to be detrimental to the euro.

The effect of cross-courses

EUR/USD exchange rate is sometimes influenced by movements of cross-courses (non-dollar rates), such as EUR/JPY or EUR/CHF. For example, EUR/USD could fall as a result of strong positive news from Japan, which is filtered through the EUR/JPY fall.

3-month Eurofutures (Euribor)

The contract reflects market expectations on 3-month euro-Euro deposits (euribor). The difference between the 3-month eurodollar cash futures and the euro-Euro deposit is a mandatory component in determining EUR/USD expectations.

Other indicators affecting the movement of the EURUSD pair

There is a strong negative correlation between EUR/USD and USD/CHF, reflecting the similarity between the euro and the Swiss franc. This is because the Swiss economy is heavily dependent on the Eurozone economy. In most cases, the fall EUR/USD is accompanied by a fall in the EUR/CHF. However, this does not always work in a crisis situation.

Political factors

Like all courses EUR/USD susceptible to political instability, like the threat of a coalition government 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 investment in Russia.