What Are the Economic Drivers of the Euro?

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The euro currency is shared by 19 countries that are a part of the European Union (EU). The euro was introduced by the EU in 1999 and is considered a major step in the economic plan for European integration. Over 337.5 million citizens of the EU now utilize the euro as their official currency. On the other hand, despite the supposed usefulness of the euro, it can be challenging for forex traders to keep up with market drivers of the euro due to the economic diversity of the various member states.

European Central Bank

Similar to the U.S. dollar, a central bank determines monetary policy affecting the euro currency. The European Central Bank (ECB), located in Frankfurt, Germany, has a primary decision-making body, known as the Executive Council, which is responsible for monetary policy. There are five members in the council which is headed by a president. Four of the seats are reserved for representation of the four largest economies in the EU: Spain, France, Italy and Germany. The council generally meets about 10 times annually.

Price Stability

Unlike the U.S. Federal Reserve Bank, the ECB does not focus on employment and stable long-term interest rates. Instead the ECB makes its decisions with the principle aim of maintaining price stability while general economic policies are of secondary importance. Therefore, forex traders attempting to speculate on future key interest decisions will pay particular attention to economic data related to consumer inflation. Rising interest rates are generally considered bullish for the euro.

ECB Bank Notes

In addition to interest rate decisions, the ECB also has the ability to issue banknotes in order to stimulate the economy. ECB policymakers may decide to inject liquidity into the system via bank notes during times of financial crisis. This is what the ECB did during the last global financial crisis that started in 2008. Issuing additional monetary stimulus via bank notes is usually considered bearish for the euro due to an increase in supply of money.

Economic Data

Like other currencies, the market valuation of the euro is highly dependent upon economic data releases. However, not only do forex traders need to pay attention to economic data pertaining to the eurozone as a whole, they should also keep an eye on economic data releases for the individual countries in the EU. These economic releases help currency traders obtain a more clear view of the health of the European economy.

On the other hand, there are other factors which forex watch. This includes political instability in one of the various member countries which could affect market sentiment. Also, currency traders should also consider technical analysis in conjunction with economic fundamentals and market sentiment when making market projections on euro currency fluctuations.

Writer Bio

LeBach PhamLe Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.





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