The European Union (EU) consists of 27 member states. It was developed from an alliance of 6 neighboring countries in 1951. Constrained by the Maastricht Treaty, the European Union has gradually evolved into an economic and political bloc, the world’s largest economic zone, and has played a massive role in international transactions and global financial affairs.
Nineteen member states choose to use the euro (EUR) as their unified currency among the EU member states. These countries formed the Eurozone, also known as the European Monetary Union (EMU).
Members of this elite group include Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Spain, Latvia, and Lithuania.
In addition to adopting a unified currency, these countries also follow the same monetary policy set by the European Central Bank (ECB).
⊙ Member States: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Spain, Latvia, and Lithuania;
⊙ Area: 1,691,658 square miles;
⊙ Population: 505,665,73;
⊙ Population density: 300.9 people per square mile;
⊙ President of the European Commission: Jean-Claude Junker;
⊙ President of the European Parliament: Martin Schulz;
⊙ President of the European Council: Donald Tusk;
⊙ Currency: Euro (EUR);
⊙ Main imported commodities: machinery, automobiles, airplanes, plastics, crude oil, chemicals, textiles, metals;
⊙ Main export commodities: machinery, motor vehicles, airplanes, plastics, pharmaceuticals, and other chemicals, Banderas (Antonio Banderas), Cruz (Penelope Cruz);
⊙ Import partners: China 15.98%, the United States 11.97%, Russia 11.22%, Norway 6.13%, Switzerland 5.14%;
⊙ Export partners: US 19.07%, Russia 8.03%, Switzerland 7.49%, China 6%, Turkey 4.14%;
⊙ Time zone: GMT, GMT East 1st, GMT East 2nd;
⊙ Website: http://www.europa.eu.
The Eurozone includes more than half of the EU countries. In 2011, the eurozone became the world’s largest economy with a GDP of 18.45 trillion euros. The Eurozone economy is service-oriented, with service industry revenue accounting for 70% of GDP.
In addition, the Eurozone is the second most attractive investment market for domestic and international investors.
As an economic union, the Eurozone has a standard legal system, especially in terms of trade. The overall economic scale of the Eurozone makes it an essential player in the international trading arena.
Because multiple countries appear as the same entity, their transactions are promoted, especially with their first trading partner, the United States.
Active participation in international trade makes the euro, which is one of the reserve currencies, important.
Countries that trade in the euro area require large amounts of reserve currency to reduce foreign exchange transaction risks and reduce transaction costs.
Monetary and fiscal policy
The European Central Bank (ECB) is the competent authority of the European Union’s monetary policy. The executive board led by central bank governor Mario Draghi also includes a deputy governor and four policymakers. Together with the top executives of central banks in the euro area, they formed the European Central Bank Management Committee, which has the right to vote on changes in monetary policy.
The main task of the European Central Bank is to maintain price stability throughout the region-very demanding! To achieve this goal, the eurozone countries signed the Maastricht Treaty, which stipulated the code of conduct of each member state. Here are some of them:
⊙ The inflation rate of one country must not exceed 1.5% of the average inflation rate of the three countries with the best performance (lowest inflation rate);
⊙ The long-term interest rate shall not exceed the interest rate of these well-performing countries by more than 2%;
⊙ Within a certain period, the exchange rate must be within the exchange rate mechanism;
⊙ The government deficit must not exceed 3% of GDP.
If a country fails to meet the above requirements, a significant fine will be imposed.
The European Central Bank uses benchmark interest rate adjustments and open market operations as its monetary policy tools. The European Central Bank’s benchmark interest rate or refinancing rate is the rate of return that the central bank gives to member countries’ central banks. The central bank uses this interest rate to control inflation.
Open market operations are used to control interest rates, control liquidity, and express monetary policy positions. These policies are achieved through government repurchases of government securities.
The European Central Bank buys securities, pays out euros, and then circulates them to increase liquidity. On the contrary, the European Central Bank sold securities in exchange for the euro to solve the excess liquidity.
In addition to using monetary policy tools, the European Central Bank will also intervene in the foreign exchange market to reduce inflation. Therefore, traders should pay close attention to the comments of the management committee members because they have a significant impact on the euro.
Understanding the Euro
In addition to being called anti-dollar, the nickname of the euro also has fiber. Some people say that this nickname originated from the trans-Atlantic fiber (for communications), and some people think it originated from the paper used to print currency. Here are some characteristics of the euro.
They called me anti-dollar!
The euro is a well-known anti-dollar, and the euro/dollar is the most widely traded currency pair. At the same time, they are also the most liquid and have the smallest spreads.
I am busy in London trading hours.
The euro is most active at 8:00 GMT-London trading hours. The next US trading hours-around 5:00 PM GMT-usually do not change much.
I have some relationships.
The trend of the euro/dollar is related to the movement of capital markets such as bonds and stocks. It is inversely related to the S&P 500 index, which reflects changes in the US stock market.
After the financial crisis in 2007, the changes between the two were not synchronized. Now EUR/USD has a slightly positive correlation with the S&P 500 index.
The trend of the euro/dollar is inversely related to the direction of the dollar/Swiss franc, which shows that the Swiss franc changes in parallel with the euro.
Significant economic indicators of the euro
⊙ Gross domestic product: Gross domestic product mainly measures the economic growth of the region. Since Germany is the largest economy in the euro area, its GDP has the most significant impact on changes in the euro;
⊙ Employment changes: The Euro is also very sensitive to changes in the employment situation, especially to the changes in employment of the major economies in the region, Germany and France;
⊙ German industrial production: This data measures the total output of German manufacturing and extractive industries. Therefore, it reflects the strength of German industrial activity in the short term;
⊙ German IFO Business Climate Index: This is one of the critical business surveys in the country. The survey is conducted once a month to study the current state of German business and expectations of future conditions;
⊙ Budget deficit: The Maastricht Treaty stipulates that economies in the eurozone should keep their debt to GDP ratio below 60%, and the deficit should not exceed 3% of annual GDP. Failure to achieve these goals will result in eurozone fiscal fluctuations;
⊙ Consumer Price Index (CPI): Since one of the goals of the European Central Bank is to maintain price stability, they are very concerned about inflation indicators such as CPI. If the annual CPI deviates from the central bank’s goals, the European Central Bank will use monetary policy tools to control inflation.
What makes the euro fluctuate?
The overall economic performance of the euro area is good, or the financial performance of its member countries is good, the euro is bullish. For example, unexpectedly high German or French GDP reports will make investors bullish on the euro.
Changes in the US economy
The sudden changes in market sentiment are affected mainly by the impact of US economic data on the trend of the euro/dollar.
The euro, an “anti-dollar” currency, has also been affected by global foreign exchange reserves getting rid of dollar assets and striving for diversification. Some people have proposed to use the euro as a new reserve currency.
Difference in yield
The yield spread between the US 10-year Treasury bond and the German 10-year Treasury bond will reflect the direction of the euro/dollar.
If the spread between the two bonds becomes more extensive, the euro/dollar changes according to the change in the higher-yielding currency.
Similar to bond yields, the difference between interest rates is also an essential indicator of the euro/dollar changes. For example, investors often compare the difference between the eurozone interbank interest rate futures and euro-dollar futures earnings.
Note: “Euribor” is an abbreviation for the Eurozone Interbank Offered Rate. Banks use the interest rate in the euro area for inter-bank transactions. Eurodollar futures are priced in US dollars.
The volume of EUR/USD transactions is measured or denominated in Euros. A standard lot is 100,000 Euros, and a mini lot is 10,000 Euros.
The value of each point is denominated in US dollars. In the exchange rate expressed in euro/dollar, four decimal places are one point.
Gains and losses are denominated in US dollars. In the case of 1 standard lot, the value of each change is $10; for the mini lot, the value of each change is $1.
The calculation of margin trading is based on US dollars. For example, if the current exchange rate of EUR/USD is 1.4000 and the leverage is 100, the minimum margin required to trade a standard lot should be $1400.
As the euro/dollar exchange rate rises, the amount of dollar margin required increases. The euro/dollar exchange rate fell, and the amount of dollar margin required decreased.
EUR/USD trading tips
The bullish euro usually appears after the solid economic report in the eurozone is released, which brings opportunities for extended EUR/USD trading.
A bearish euro usually appears after the weak economic report in the eurozone is released, providing a basis for short EUR/USD trading.
Since the EUR/USD trend is usually used as an indicator to measure traders’ attitude towards the USD, understanding the USD trend will provide some trading strategies for EUR/USD trading.
For example, if the US retail sales report exceeds expectations, traders will buy US dollars, then you should be short EUR/USD.
In addition to waiting for the EUR/USD test or breaking necessary support or resistance levels, trading based on retracements also works.
The EUR/USD is very sensitive to retracement, which means that short or long trades at critical Fibonacci levels will also make money. By using retracement, investors will get a more suitable price when entering the transaction than jumping according to the price change direction.
If you are adventurous, there are other Euro pairs, such as EUR/JPY, EUR/CHF, and EUR/GBP, to choose from. Each Euro pair has its unique features.
For example, the instability of the euro/yen is higher than that of the euro/dollar, and it is more active during trading hours in Asia and London.
The changes in EUR/GBP and EUR/CHF have been consolidating most of the time. Due to low liquidity, the latter is more prone to a sharp rise.