Besides the US dollar, which is the world’s reserve currency and therefore the most important one, Euro is coming in second place as Euro related currency pairs are heavily traded.
More precisely, the EURUSD, for example, is the most liquid currency pair and this means that there are more traders exchanging hands on it than on any other currency pair. EURJPY, EURGBP, and other Euro related pairs follow closely so understanding what moves Euro from a fundamental point of view is important to any analysis.
Long story short, it all comes down to the central bank that governs the Eurozone economies, European Central Bank (ECB). Currency trading is strongly dependent on the central bank’s monetary policy and interest rate decision as traders and money managers are always looking for a higher yield for their investments.
When it comes to trading a currency, the one with a higher interest rate is always offering a higher yield so the interest rate is all that matters in the forex market.
ECB is meeting every six weeks (this has changed in the last few years as it used to meet on a monthly basis) in order to assess the shape of the Eurozone economy and to set the monetary policy for the period ahead.
The Governing Council’s meeting is taking place on a Thursday, in the middle of the London session and right at the opening of the North American one.
The first thing to be announced is the interest rate decision (if the ECB is on hold, cuts or hikes the rates) followed by a press conference forty-five minutes later. In contrast to the Federal Reserve of the United States (that holds a press conference every other two meetings), the ECB is having a press conference after each and every meeting with the purpose of presenting the central bank’s state of the economy and making sure the forward guidance is well understood.
Needless to say that volatility surrounding such an event is really high on the Euro related pairs as traders will look for clues about future direction.
Most of the time, if not every time, the press conference is more important than the actual interest rate decision as any decision can be downplayed at the press conference. For example, the ECB may hike the rates and the Euro will spike higher however; forty-five minutes later the statement to say that it was only a single hike and not the start of a tightening cycle. This should see the Euro reversing all or some of the earlier gains.
The press conference is divided into two parts with the first part showing the President of the ECB reading the monetary policy statement and the second part having press representatives asking questions.
This question and answer session brings a lot of movement in the market as both are unpredictable.
Besides the actual interest rate decision, a market participant will always have expectations about what the ECB is going to do at the next meeting. Because the ECB has only one mandate (to keep inflation below or close to two percent), it is the Consumer Price Index (CPI = Inflation) that influences market expectations.
Higher inflation levels are always being associated with a hawkish tone from the ECB and a possible rate hike, while lower inflation is being viewed as dovish for a currency as expectations grow that the central bank will ease the monetary policy.
Jobs data is not on the ECB watch list like it is in the United States and for this reason, you will see little or no movement on the Euro pairs when jobs data is announced.
The next in line in terms of importance of Euro-area economic releases are the Purchasing Manager’s Index (PMI’s). These refer to the manufacturing and services sector and the values are compared with the fifty level.
Levels less than the fifty level show a sector that contracts while above fifty should be seen as positive for the sector and therefore for the currency.
ECB members are also holding speeches in between meetings but these speeches are viewed by markets as not that important as the speeches held by the Federal Reserve members.
Despite being one of the most traded currency, the Euro is hardly influenced by something else than the events described above. Look for any speech of the ECB President to be important, like testimonies in front of the European Parliament, as traders will look to position themselves for the next ECB meeting.