Lessons

Dependencies of the major currencies

Eurozone: The 18 countries that have adopted the euro as their currency are Austria, Belgium, Germany, Greece, Estonia, Ireland, Spain, Italy, Cyprus, Latvia, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Finland, France .European Central Bank (ECB): Controlling the monetary policy of the euro area. The main body of the ECB is the Governing Council, which consists … Continue reading Dependencies of the major currencies
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Eurozone: The 18 countries that have adopted the euro as their currency are Austria, Belgium, Germany, Greece, Estonia, Ireland, Spain, Italy, Cyprus, Latvia, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Finland, France .
European Central Bank (ECB): Controlling the monetary policy of the euro area. The main body of the ECB is the Governing Council, which consists of the members of the Executive Board and the governors of national central banks of the euro area. The Executive Board shall be composed of the President of the ECB, the Vice-President and four other members.
ECB Policy Objectives: The ECB’s main objective is price stability, which is based on the two pillars of monetary policy. The first is the prospect of price developments and the risks associated with price stability. For its part, price stability is defined as an increase in the Harmonized Index of Consumer Prices (HICP) to levels below 2%. While this index is important, a large number of indicators and projections are used to determine the medium-term threat to price stability. The second pillar is monetary growth measured by M3. The ECB has set a “reference value” of 4.5% M3 growth on an annual basis of 5%.
The ECB holds a meeting of the Governing Council every second Thursday and issues a statement of interest rates. After each first meeting of the month, the ECB holds a press conference presenting its vision of monetary policy and the economy as a whole.
Interest rates: The ECB’s refinancing rate is the key short-term interest rate that governs liquidity. The difference between the ECB’s refinancing rate and the Fed’s main rate is a good indicator of EUR / USD.
3-month Euro Deposits (Euribor): Deposits denominated in euro in non-euro area banks are called Euribor deposits. The interest rate on the three-month Euribor deposit held in a bank outside the Eurozone serves to determine interest rate differences that are predicted by foreign exchange rates. If we use the theoretical example: EUR / USD – the greater the difference in interest rates in favor of Euribor against the Euro-dollar deposit, the more likely EUR / USD is to rise. There are cases where the above is not true due to the influence of other factors.
Another key factor for the EUR / USD quote is the difference in interest rates between the US and the euro area.
10-year government bonds: Another key determinant of the EUR / USD quote is the difference between US and euro interest rates. The German 10-year bond is usually used as a template. If the yield on the 10-year German bond is below that of the 10-year US bond, narrowing this gap will be in favor of EUR / USD. Extending this margin will be negative. For this reason, it is important that the 10-year German and US bond margins be monitored. The direction of this difference is more important than the rate of return of the instruments. The interest rate differential is usually an indicator of US and Eurozone growth, which is a factor in determining the exchange rate.
Economic data: The most important economic data are German – the largest economy. Key data are GDP, inflation (consumer price index and HICP), industrial output and unemployment. Germany is the most important IFO survey, which is a widely accepted indicator of business confidence. Also important is the budget deficit, which, according to the Stability and Growth Pact, should be below 3% of GDP. Other countries also aim to reduce their deficits, which, if they fail to do so, negatively affects the euro (as seen in Italy).
Cross-effect effect: The EUR / USD currency pair is sometimes influenced by couples’ movements that do not involve the US dollar, such as EUR / JPY. For example, EUR / USD may drop (EUR decrease) if there are positive news for Japan that will lower the EUR / JPY exchange rate. On the other hand, USD / JPY may decline due to a weak euro – a lower EUR / USD price, respectively.
3-month Euro Euribor This contract reflects the market expectations for the 3-month Euro Euribor deposit in the next period of time. The difference between a futures contract of a 3-month Eurodo dollar and a EuroEuro deposit agreement is an important variable in predicting the value of EUR / USD.
Other Indicators: There is a strong negative relationship between EUR / USD and USD / CHF, which reflects a similar permanent relationship between the Euro and the Swiss franc. This is due to the fact that the Swiss economy is strongly influenced by the eurozone. In most cases, the EUR / USD jump (drop) is accompanied by a EUR / CHF decline (jump). The opposite is true. The relationship is sometimes not so strong – in the case of data or factors relating only to one or the other of the currencies.

Political factors: Like other currency pairs, the EUR / USD is also prone to political instability as a threat to coalition governments in France, Germany or Italy. Political or financial instability in Russia is also a factor in EUR / USD because of the significant value of German investments in Russia.

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