Euro (EUR)

Economic Overview

The Euro is the official currency of the 12 European Union member states. These are Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Slovenia is scheduled to join the Eurozone in 2007.

The Euro is the single currency for more than 300 million people in Europe.

The European Union (EU) is an intergovernmental and supranational union of 25 democratic member states. It is the world’s largest confederation of independent states, established under that name in 1992 by the Treaty on European Union (the Maastricht Treaty). However, many aspects of the Union existed before that date through a series of predecessor relationships going back to 1951.

Leading Export Markets for the EU are:

1. The United States
2. Switzerland
3. Japan
4. Poland
5. China

Leading Import Countries:

1. The United States
2. Japan
3. China
4. Switzerland
5. Russia

Like the US, the EU is primarily a services oriented economy.

The European Central Bank (ECB) is one of the world’s largest central banks and is in charge of monetary policy for the the Euro. The ECB was established on June 1, 1998 and is headquartered in Frankfurt, Germany.

In 1999 Wim Duisenberg, the former president of De Nederlandsche Bank, and former finance minister of the Netherlands became the first president of the ECB.

In November 2003 Jean-Claude Trichet followed and is still president today.

The ECB strives to achieve price stability. Price stability is defined as an increase of the Harmonized Index of Consumer Prices (HICP) of below 2%.

HICP is an inflation indicator provided by Eurostat used by the European Central Bank. Eurostat has published the index since 1995. The ECB aims to keep consumer price inflation in a range of 0 to 2 percent.

The second main measure of monetary growth is M3.

M3 is a measure used to guage the entire supply of money within an economy. The ECB closely monitors M3 as it is seen as an important indicator of inflation.

The ECB has a “reference value” of 4.5% annual growth for M3.

The ECB holds a Council meeting every other Thursday to make announcements on interest rates. At each first meeting of the month, the ECB holds a press conference where it presents its outlook on monetary policy and the economy as a whole.

If considered a single unit, the European Union has the largest economy in the world, with a GDP of 12,427,413 million USD (2005) using Purchasing power parity (PPP) equivalence.

The EU’s economy is expected to grow further over the next decade as more countries join the union — especially given that the new states are normally poorer than the EU average, and can grow at a higher rate.

EU member states have agreed a program called the Lisbon Strategy which aims at making “the EU the world’s most dynamic and competitive economy” by 2010.

As the Euro has become a more established currency and the EMU has increased it’s members, the Euro’s importance as a reserve currency has increased. Foreign banks are expected to increase their reserves of Euro holdings, which should cause an increased demand for the currency.

At the end of the 1990’s, 65% of all world reserves were held in US Dollars – however a shift has started to favor the Euro as a foreign reserve currency.

Characteristics of the Euro

The ECB’s refinancing rate is the Bank’s key short-term interest rate used for managing liquidity. The difference between the refinancing rate and the US Fed Funds rate is a good indicator for the EUR/USD.

The EUR/USD cross is the most liquid currency. Its movements reflect the economic wellbeing of the European and US economies. EUR/JPY and EUR/CHF are also highly liquid and reflect the state of the Japanese and Swiss economies.

The spread between the US Ten Year Note and the German Bund can give some insight into the movement of the euro. If the bund interest rate is higher, and increasing, this is bullish for the euro.

The euro interbank offer rate or Euribor is another useful interest rate to watch. The Euribor is the rate offered from one large bank to another on interbank term deposits. Comparing the rates between Eurodollar futures and Euribor futures can give an idea of the movement of the Euro – as the spread widens in favor of Euribor this suggests money will flow into the Euro.

The EUR/USD exchange rate is sometimes impacted by movements in cross exchange rates (non-dollar exchange rates) such as EUR/JPY or EUR/JPY. For example EUR/USD could fall as a result of significantly positive news in Japan, that filters through a falling EUR/JPY rate. This is known as the ‘cross rate effect’.

Economic Indicators

The largest countries in the EMU are France, Germany and Italy. It is particularly important ot watch GDP, inflation and unemployment for these countries.

The most important economic data is from Germany, the largest economy, and from the euro-wide statistics.

German Industrial Production

Importance: Highest.
Published by: Federal Statistics Office, Germany.
Frequency: Monthly.
Release Time: 11 AM Continental Time during the Second Week of the Month
Coverage: Activity of two months prior.
Web: https://www.destatis.de/indicators/e/tkpi111x.htm
Revisions: Cover the two prior months, if there are any.

The German Industrial Production release reflects the industrial output of Europe’s largest economy and is an important leading indicator of Europe’s economic wellbeing. Further, as the world’s second largest exporter, German Industrial Production is an indicator of global importance.

German IFO Business Survey

Importance: High.
Published by: IFO Institute for Economic Research.
Frequency: Monthly.
Release Time: 10 AM Continental Time during the Final Week of the Month
Coverage: Same month as the release.
Web: https://www.cesifo-group.de/portal/page?_pageid=36,34759&_dad=portal&_schema=PORTAL
Revisions: Rare

The German IFO Business Survey provides an assessment of the current and upcoming economic climate – and is derived from the feedback of over 7,000 German Business Leaders. It is seen as a leading indicator of both the German and the European economy’s wellbeing. The data in the report is fresh – covering the same month as it’s release.

The report includes the total IFO Business Climate Index and two subcomponents – the present situations index (which covers current economic conditions) and the expectations index (which attempts to forecast economic conditions). The European markets are most sensitive to the expectations index.

German Consumer Price Index (CPI)

Importance: High.
Published by: Federal Statistics Office, Germany.
Frequency: Monthly.
Release Time: 7 AM Continental Time. The Preliminary CPI is published around the 25th of each month and the final numbers are released two weeks later.
Coverage: Preliminary CPI covers the same month and Final CPI covers the prior month.
Web: https://www.destatis.de/indicators/e/pre110je.htm
Revisions: The report may contain revisions for prior months.

This release is the principle price inflation gauge for Germany. The German Consumer Price Index influences the European economy and also the the policies of the European Central Bank (ECB), which sets short term interest rates in Euroland.

Compiled by the Federal Statistics Office, CPI measures the average change in prices for all goods and services bought by households for the purpose of consumption. Normally the markets are most sensitive to the preliminary release – this is because these numbers seldom differs much from the final numbers.

From Germany in particular, the IFO survey is a very important indicator of business confidence.

Also important are the budget deficits of the individual countries, which according to the Stability and Growth Pact, must be kept below 3% of GDP. Countries also have targets for reducing their deficits further, and failure to meet these targets will be bearish for the euro.

There is a strong negative correlation between EUR/USD and USD/CHF. You can see a table of correlations over different time periods here:

https://www.mataf.net/en/analysis-correlation.htm