Currency- Euro (EUR)

education-icon_euroThe European Union (EU) is made up of 27 member states, but only 17 of these nations use the single currency, known as the euro.These countries using the euro make up the eurozone: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

The history of the euro is something that traders must be aware of in order to have a complete understanding of the fundamentals of the currency.

Historical Origins of the Euro

Before the EU as we know it today was formed, a group of only six countries – France, West Germany, Italy, Belgium, The Netherlands and Luxembourg – formed the European Coal and Steel Community (ECSC) at the end of the Second World War. The ECSC would set the framework of how the EU would later work. It basically went on to form the Common Market, known as the European Economic Community (EEC), which was the predecessor to the EU.

The main goals of the European Coal and Steel Community and later the Common Market, were to lower trade barriers and promote economic cooperation between the member nations.

The most important event that eventually followed was the ratification of the Maastricht Treaty in the 1990′s. With this treaty, member states shifted from straightforward economic collaboration, to the much more ambitious goal of political integration between member nations. It was in the Maastricht Treaty where the basic fundamentals of the euro were outlined. Some of the steps needed to be completed before the single currency could be released were the coordination of economic policies and free circulation of capital among member states.

In 1999 the European Central Bank (ECB) was established and upon the introduction of the euro, monetary policy would be set by the ECB and the member states would be bound by this. The ECB’s main aim is to maintain price stability.

The following 11 countries began to use the euro: Germany, France, Spain, Portugal, Italy, Belgium, the Netherlands, Luxembourg, Austria, Ireland and Finland. These countries formed what is known as the European Monetary Union, which is made up of countries who are members of the European Union, and now use the euro as their currency. Later other countries also joined the monetary union: Greece, Cyprus, Malta, Slovakia, Slovenia and Estonia.

Currency Fundamentals

As you have seen, 17 countries make up the eurozone. However, when it comes to economic indicators, not every country’s data will have a huge impact on the euro.

It is logical to say that the biggest economies of the euro area will have the most impact on the value of the single currency. One of the most important country’s to follow is Germany, which is of course the largest economy in the eurozone and is perceived as the region’s powerhouse.

The next biggest economies are France, Italy and Spain. Over 75 percent of the eurozone’s GDP is accounted for by these four largest economies. Due to this fact, economic data out of these countries has a tendency to move the euro the most, so traders naturally pay the most attention to these.

Of all the economic data released in the eurozone, the ones that affect the current account (trade flows) or interest rates (capital flows) will be those that have the greatest potential to move the currency.

Economic Indicators

The following are the most closely watched economic indicators that could affect the euro:

Gross Domestic Product (GDP)

It measures economic growth in the euro-region. Note that Germany’s GDP is more closely watched since it is the largest economy in the eurozone and its GDP tends to move the currency the most.

German Industrial Production

It measures German industrial activity, again important because of Germany being seen as the powerhouse of Europe.

German IFO Business Climate Survey

A report that gauges the current as well as future business conditions in Germany.

Consumer Price Index (CPI)

An important indicator on inflation. This should be watched in conjunction with the European Central Bank inflation target. If inflation is higher, or even lower than the target, then the central bank could change monetary policy accordingly, and this will have an effect on the euro.

Employment Change

The euro is particularly sensitive to changes in employment numbers in Germany, which is the eurozone’s largest economy.

European Central Bank Policy Announcements

The European Central Bank sets fiscal and monetary policy in the eurozone. It is located in Frankfurt, Germany. It is helpful to watch policy meetings and announcements on interest rate decisions. When interest rates are lowered, the euro will likely weaken, and vice versa.

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