Influencing Factors on EUR/USD
THE EURO-ZONE – The 12 countries that have adopted the Euro are Germany, France, Italy, Spain, Netherlands, Belgium, Austria, Finland, Portugal, Ireland, Luxembourg and Greece. Other member states comprise of Czech Republic, Denmark, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia, Slovakia, Sweden, and United Kingdom.
EUROPEAN CENTRAL BANK (ECB) – Controls monetary policy for the Euro-Zone. The decision making body is the Governing Council, which consists of the Executive Board and the governors of the national central banks.
ECB POLICY TARGETS – The ECB has a primary objective of price stability. It has 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). While the HICP is very 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 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 ECB’s refinancing rate is the Bank’s 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.
ECONOMIC DATA – The most important economic data generally from Germany, France, and Italy. Germany maintains the largest economy in Europe. 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 watched indicator of business confidence. Also important are the budget deficits of the individual countries, which according to the Stability and Growth Pact. Countries also have targets for reducing their deficits further, and failure to meet these targets will likely be detrimental to the euro (as we saw with Italy’s loosening of its budget deficit guidelines).
CROSS RATE EFFECT – The EUR/USD exchange rate is sometimes impacted by movements in cross exchange rates such as EUR/JPY or EUR/GBP. It is possible for the EUR/USD to fall as a result of significantly positive news in Japan causing a declining EUR/JPY rate.
ADDITIONAL FACTORS – 10-Year Government Bonds, 3-month Euro Deposits and Futures Contracts, and Political conditions.