Euro Trading Fundamentals

Euro trading against the dollar is the way that most forex traders start out, and yet in many cases they know virtually nothing about the euro. The euro is a very special (some might even say weird) currency because it is not the historical currency of any nation.

Instead, it was dreamed up by European bureaucrats after the formation of the European Economic Community (now the European Union). It is the second most heavily traded currency (after the US dollar), so it is a very important force in the forex market.

The EEC/EU began as a way of lowering trade barriers between countries in Western Europe. Over the years it has expanded to include countries in Eastern Europe and more importantly, it has enlarged its brief.

Most significant for euro trading is the formation of the European Monetary Union (EMU) and the introduction of the euro, which happened in the years from 1999 to 2001.

The euro is administered by the European Central Bank (ECB). Because of its status as a multinational regulatory bank, its remit is a little different than the US Federal Reserve, for example.

The ECB is concerned solely with interest rates and maintaining price stability within the Eurozone, while the Federal Reserve and most other national central banks also have to consider the effects of their decisions on employment levels.

This means that the ECB has a more hawkish approach to interest rates. This means that they tend to favor an increase in interest rates. They will put the interest rates up more quickly than the FR would when prices rise, and are less likely to lower them when prices fall.

This means that changes in something like the retail price index in Germany will not affect euro interest rates and therefore the price of the euro in the same way that the same situation in the US would affect the price of the dollar.

Another point that is important to remember if you are involved in euro trading is that although there are now 27 member countries of the EU, only 16 of them are members of the EMU (the Eurozone).

Another 5 use the euro but are not official EMU members.  The others have decided not to join the Eurozone for their own reasons.

In particular, the UK is in the EU but does not use the euro, while Switzerland is not a member of the EU at all. They have retained their own national currencies, the British pound and the Swiss franc.

In addition, many countries in the EU have a small GDP and are not great economic forces. This means that the fundamental factors affecting the price of the euro depend mainly on the economic situation in just four  European countries.

Those countries are Germany, France, Italy, and Spain in that order. Together, they produce 75% of the GDP of the Eurozone.

Therefore, the forex trader who is involved in euro trading needs to watch for major economic announcements in those four countries while understanding that the economic situation in other European countries will have much less of an effect on euro trading.

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