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Trading euro-based currency pairs requires following events that can have a major impact on the euro (also known as the “common currency”), which can be a daunting task for foreign exchange (FX) traders.
Currently, the euro is the official currency of 19 of the 27 member countries that comprise the European Union (EU). These 19 member countries form the euro area, or eurozone, which has an aggregate GDP of over $13 trillion (as of 2019). There are hundreds of economic reports that come out of the eurozone each year relevant to the foreign exchange market, but how does one know which economic reports will be the ones that move markets?
The European Union has 27 members, but few are large enough to generate economic reports that really affect the currency. The eurozone accounts for over 85% of the Gross Domestic Product (GDP) of the European Union (EU). Germany, France, Italy, and Spain together represent three-quarters of the eurozone’s $13.3 trillion GDP. So, if a trader was looking for trade-worthy reports, then the focus should be on those reports that detail these countries’ economies. In particular, economic reports coming out of Germany and France tend to be given more weight by FX traders than other countries mainly because these two, now that Brexit has happened, account for nearly 50% of the eurozone’s GDP.
It is also important to understand that the reports we list in this article are relatively standard across different countries. However, there are a handful that one should follow that emphasize the key areas of:
Prices and Inflation
Report to Focus On: Eurozone Core CPI, German CPI, French CPI
Inflation is a key factor that affects all currencies, including the euro. In general, countries with high levels of inflation relative to other countries will normally see their currency depreciate so that the prices of goods between countries remain relatively equal. In addition, higher-than-expected inflation will result in the central bank raising interest rates to tame inflation.
The key measure of inflation in the eurozone is the Consumer Price Index (CPI). This indicator calculates the price of a basket of goods that an average household is likely to purchase. Traders typically follow the Core CPI, which is the normal CPI calculation excluding energy and food prices. Energy and food prices tend to be volatile and can be greatly influenced by temporary supply and demand imbalances, as well as external random factors such as weather, which can distort the CPI number.
It is important to note that although the CPI report does have an effect on the euro, its effect is diminished because the eurozone’s CPI Flash Estimate, the French CPI Flash Estimate, and the German Preliminary CPI are released at the end of every month, about two weeks earlier than when the official CPIs are released. So, you may want to keep an eye on various inflation indicators and patterns across multiple regions, especially CPI reports from Germany and France.
Confidence and Sentiment
Report to Focus On: ZEW Survey
Another way to gauge economic conditions in the eurozone is to look at confidence and sentiment reports. One of the most widely followed sentiment reports is the German ZEW Survey, prepared monthly by the Centre for European Economic Research. The survey asks a sampling of up to 350 financial experts where they see the economy headed over the medium-term horizon. Responses are restricted to positive, no change, or negative. This simple response structure allows the ZEW indicator to clearly reflect whether experts and analysts are optimistic or pessimistic about the economy in the medium term. The survey also queries experts for the eurozone, Japan, Great Britain, and the United States.
As with most major indicators, analysts will have forecasts on what they expect the indicator to be. With respect to the ZEW indicator, if the actual ZEW indicator comes in above forecasts, this would translate into a positive effect for the euro while a ZEW below forecasts could put pressure on the common currency. A ZEW number above zero indicates optimism and a number below zero indicates pessimism.
Monetary Policy
Report to Focus On: ECB Press Releases
Every currency is affected by the monetary policies of its respective central bank. For the euro, that is the European Central Bank (ECB), and decisions regarding interest rates made by the ECB can have a significant impact. Generally, the ECB press conferences tend to be the most important news to follow, because interest rate changes are usually anticipated well in advance by the market. The structure of the press release is two-part. It contains:
- A prepared statement
- An open press question period
The question period tends to cause the most currency volatility as the answers given by the ECB president can move markets.
The press conference is key, because it can give clues about where the ECB President expects the economy to go. If the language of the ECB President appears “hawkish,” which means that she seems concerned about inflation, this could result in future rate hikes, which usually causes the euro to appreciate. Alternatively, if the language appears “dovish,” which means that she believes inflation is tame, then future rate hikes will tend to be less likely and the euro could depreciate.
GDP and Economic Growth
Report to Focus On: Eurozone GDP
The next type of report that has a significant influence on the euro are those that inform about the overall economic output of the eurozone. The economic growth and health of an economy are typically measured by the GDP, which is a periodic measure of the value of the total goods and services produced. In general, growth in GDP is a sign that the economy is strong and healthy, which is positive for the currency.
The eurozone GDP is a quarterly report prepared by Eurostat and released about two months after the end of the quarter. As you can tell, this makes the report rather untimely, and since analysts have several methods to gauge the strength of the economy, the GDP is usually anticipated in advance. Nevertheless, this report is still significant, and its release does tend to move the currency markets, especially if there is a surprise in the actual release relative to expectations.
Balance of Payments
Report to Focus On: Eurozone Trade Balance, German Current Account, French Current Account
Lastly, we’ll take a look at the balance of payments, specifically the trade balance and current account. The current account is one of the three accounts that make up the balance of payments for a country (the other two being the financial account and capital account). This report measures how a country interacts with other countries with respect to the trade balance, income payments, and other payments.
The current account report is a monthly report, usually given during the second week of each month. When interpreting this report, a current account surplus means there is more capital flowing into the country than there is exiting the country, which is positive for the currency. This occurs when exports exceed imports. A current account deficit means the opposite in that more financial capital is leaving the country than there is coming in. This tends to be negative for the currency. Since Germany and France are two of the largest countries in the eurozone, many traders will focus in on the current account report for these two nations.
The Bottom Line
There are hundreds of economic indicators that can affect the euro. Instead of simply listing reports, an in-depth look at those which are most relevant can prove to be more beneficial when trading the euro.