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What matters when trading the euro

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What matters when trading the euro

September 25, 2018

Almost twenty years after its introduction, the Euro still fascinate traders and market watchers alike. With no monetary history surviving the test of time so far, will it be the first one?

It faced so many adverse conditions that few gave Euro a chance. In a typical European fashion, Euro, Eurozone, and the European Union aren’t the same thing.

Not all countries part of the European Union share the common currency. That’s not a secret in Europe, but for the American traders, for instance, it often comes as a surprise.

The shared currency for nineteen European countries (with the strongest economies among them), the Euro was born as the pillar of a new European identity.

For the Forex market and dashboard, it had a tremendous impact. Although the retail Forex market was just in its incipient stages, the effect was visible on the interbank market.

Suddenly, essential currencies like the German Deutschmark or French Franc “melted” into one currency that no one knew if it’ll be a success or not. But the stake was too high for Europe not to try. Savaged by decades of war, the European Union meant to unite the people of Europe under the same principles. It only became natural for the Euro to be the pillar and symbol of a united Europe.

Euro and the Forex Market

The Euro simplified trading a lot. The second most important currency on the Forex dashboard (after the USD – the world’s reserve currency), the Euro and the Euro pairs are responsible for a big chunk of the daily Forex turnover.

It isn’t by chance, as the Eurozone economies combined make up the second largest economy in the world after the United States. Hence, it makes the EURUSD pair an important one in the Forex dashboard. And, on top of that, the most liquid currency pair too, resulting in very low spreads between the bid and ask prices.

The EURGBP pair is a cross pair as there’s no USD in its componence. As a rule of thumb, any currency pair that doesn’t have the USD in its componence is a cross. The rest are all major pairs.

The EURGBP has a bigger spread than the EURUSD for the simple reason that it’s less liquid. Especially when the positions are rolled over at midnight, the EURGBP and other crosses experience wider spreads.

Besides these two Euro pairs, when combining the Euro currency with other important economies, another crosses result. From all the combinations possible, in terms of the Forex dashboard’s importance, the EURAUD, EURCAD, and EURJPY come to complete the picture. Some traders also use the EURNZD cross to speculate, but the spreads are quite big and the moves erratic.

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What Moves the Euro

When compared with the USD, there isn’t much of economic data that matters for the Euro. However, the one matters may shift the sentiment on the common currency easily.

It all starts with the ECB (European Central Bank) decisions and monetary policy changes. Every six weeks, on a Thursday, the ECB’s Governing Council releases the monetary policy decision regarding the key interest rate level.

Released forty-five minutes earlier than the press conference, the interest rate decision is highly-anticipated and known in advance by market participants. Because of the forward guidance principle (Federal Reserve of the United States, Bank of England and, recently, Bank of Japan), the ECB communicates well in advance the changes in the interest rate level.

Rarely, or, more exactly, never in the recent history, the market entered the ECB interest rate decision time without knowing what to expect. And, if that would be the case, the ECB won’t allow it as “sources” will always prepare the market for what the interest rate decision will be.

Having said that, the focus shifts to the press conference that starts forty-five minutes later. Split into two parts, the press conference causes terrific shifts in the Euro sentiment.

A slight change in wording or introduction or new text in the statement is enough for sentiment to change from bullish or bearish or the other way around. Because trading is a game of expectations, market participants react in an instant to any hawkish or dovish statement.

Inflation Expectations

Like any central bank, the ECB has a mandate. That is, to maintain price stability in the Eurozone.

Despite what many retail Forex traders believe, price stability doesn’t refer to the Euro pairs to keep a tight range and not to fluctuate.

Instead, it refers to the prices in the Eurozone to remain stable and to follow the path targeted by the ECB. Changes in the prices of all goods and services are reflected in the Consumer Price Index. Or, in plain English, inflation.

There is a consensus among major central banks in the world that economic growth requires a certain inflation level. By default, they all target values for inflation below or close to two percent, but voices are claiming even higher values are mandatory.

It’s a bit ironic that central banks, vowing to maintain price stability, try to create exactly the opposite, but as long as there is trust in the fiat money, studies show that moderate inflation is beneficial to economic growth.

All Euro pairs mentioned in this article will rise or fall when inflation misses the expectations. The good part is that inflation comes out between two ECB meetings, so traders have enough time to prepare for the actual ECB decision.

Conclusion

Any other economic data from Eurozone comes as secondary in importance. It is hard to believe, but even data like the changes in the value of PMI’s (Purchasing Managers Index) won’t cause much of damage or add value to any Euro pair.

Everything is interpreted through the eyes of inflation and what impact other economic data has on inflation. If anything, one market to keep an eye on when trading the Euro is the oil market.

The price of oil has a strong inflationary component and, not once, it caused major central banks, ECB included, to change its monetary policy as energy prices distort CPI data.



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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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