EUR explained: A guide to the euro

The euro is a major world currency and the currency most used by the world’s largest trading bloc, making it a powerhouse in the forex market. Discover everything you should know about EUR before you open a position.

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Introduction to the euro

The euro is the currency and legal tender of 19 European Union countries collectively known as the Eurozone. Introduced in 1999, it is the second most-traded currency in the world after the US dollar, as well as the second most-widely held reserve currency in central banks, also after the US dollar. Additionally, EUR is used as official currency by a range of overseas departments worldwide, for example the French-owned territories Guadeloupe and the island of Saint-Barthélemy.

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Economy of the Eurozone

With a projected GDP of 12.7 trillion for 2021, the Eurozone collectively would have the third-largest global economy, after the US and China, according to statistics from Trading Economics. 

Today, the Eurozone’s strongest economies are Germany, France, and Italy. While the range of industries across the Eurozone is diverse, there is considerable crossover between countries. In particular though, Germany’s key strengths lie with mechanical engineering, aviation and automotive, with standout sectors for France including tourism, agriculture and transport, and Italy’s focus including textiles, chemicals and machinery.

In terms of international trade, the EU had a 2020 trade surplus with the US of €150 billion, with Eurozone countries Germany, Italy, France and Netherlands accounting for the vast majority of that figure. The EU’s trade deficit with China was €181 billion in 2020.

History of the Eurozone

The economic history of the Eurozone goes back to 1991 with the signing of the Maastricht Treaty, an agreement between 12 countries of the-then European Community (now EU) to initiate a monetary and economic union.

The European Central Bank (ECB) was established in 1998 as the central bank of the 19 EU countries that have the euro as their official currency. The ECB’s duty is to oversee monetary policy and maintain financial stability across the region.

Following the ECB’s introduction, January 1999 saw the euro introduced as a non-cash (electronic) monetary unit with the signing of the Treaty of Amsterdam. In 2002 banknotes and coins went into circulation, marking the point at which the euro became the sole currency of 12 EU member states.

Over the years, other countries joined the euro, to arrive at the aforementioned figure of 19 member states out of a total of 27 EU member countries. The most recent additions to the list are the Baltic states Estonia (2011), Latvia (2014) and Lithuania (2015).

What moves the price of the euro?

There are a variety of factors that influence the price of EUR against other currencies. These include monetary policy decisions from the ECB, economic data, as well as balance of payments (export and import values).

Traders should be aware of ECB meeting dates and the release dates of key reports to help them keep on top of developments. Check out our economic calendar and don’t miss the latest announcements that can move markets.

It’s important to note that while EUR may be strengthening or weakening, you still have to consider how the other currency in the pair is performing before assessing the reasons for a pair’s moves.

Monetary policy

The ECB controls monetary policy and its governing council sets rate targets. Through its governing council, the ECB may look to raise interest rates to control inflation or lower rates to encourage borrowing and consumer spending. Higher rates tend to stimulate foreign investment, meaning the demand for that particular currency is greater. In turn, this means EUR is likely to strengthen against a basket of other currencies.

What that said, many analysts believe, as of July 2021, that interest rates are unlikely to rise across the Eurozone for some time due to a perception that a spike in inflation may be transitory, as well as a belief that policymakers are more focused on a recovery from the coronavirus pandemic than inflationary pressures. 

Conversely, when interest rates are lowered in an attempt to stimulate economic growth, investors may seek currencies with a better return, pushing the EUR price down.

However, EUR can also suffer when rates are expected to be lowered but are not. In March 2020, the euro plunged against USD when the ECB approved stimulus measures following the economic disruption caused by the pandemic, but failed to lower interest rates, an action which could have been a lifeline for stricken businesses. Instead, market speculators opted for the safe haven of USD at that point.

However, in the following months, EUR surged against greenback as the €750 billion European recovery fund was approved by the European council.

News reports

News reports to look out for when trading EUR include sentiment, which shows whether traders are net long or short. This may encompass data such as the German ZEW Survey, a widely-cited measure of analyst expectations for the economic outlook.

Inflation data such as CPI figures covering the major Eurozone economies can also be helpful, as well as stats around consumer confidence, and of course GDP data, the definitive measure of economic activity in leading Eurozone countries.

Other measures of how the economy is doing can be found in retail sales, and services and manufacturing PMIs for relevant territories.

Political/socioeconomic events

Political and socioeconomic influences can hit the euro hard due to the sometimes discordant relationship between the key players of the monetary union’s governance. For example, the 2011 sovereign debt crisis that swept through a range of European countries placed the ECB at odds with other European leaders and saw EUR plunge as a result.

Popular euro currency pairs

EUR/USD

EUR/USD is the forex ticker for the exchange rate between the euro and the US dollar. It tells traders how many dollars are needed to buy one euro in real time.

The pair is the world’s most traded, accounting for around 24% of all currency trades, according to 2019 figures from the Bank for International Settlements. Due to the pair’s ongoing popularity, liquidity is consistently high, reducing slippage for traders, and spreads are tight, minimising the cost of trading.

For this pair, traders will need to consider fundamental factors surrounding the European Central Bank, such as ECB interest rate decisions, as well as those US releases capable of moving price. Due to its high trading volume, EUR/USD isn’t generally known for high volatility, meaning it may be less susceptible to sudden and large price shifts.  

EUR/GBP

EUR/GBP is the forex ticker for the exchange rate between the euro and the British pound. It tells traders how many pounds are needed to buy one euro in real time.

The pair is consistently in the top ten most traded in the world. As both currencies are heavily traded the pair’s high liquidity, tight spreads and relatively low volatility are consistent. When trading the pair, speculators should be mindful of Bank of England announcements as well as the economic and political factors that can affect the value of GBP, in addition to a scrutiny of the fundamental drivers on the EUR side.

EUR/JPY

EUR/JPY is the forex ticker for the exchange rate between the euro and the Japanese yen. It tells traders how many Japanese yen are needed to buy one euro in real time.

When trading pairs involving JPY, traders should be aware of the impact Japanese economic initiatives can have on the currency, as Bank of Japan announcements can be influential. Also, data points such as the Tankan survey and the Tokyo Area CPI can give useful information on business performance and inflation rates respectively. Also, Japan’s currency can be sensitive to factors with which traders may be unfamiliar, such as natural disasters.

Euro trading hours

The Euro is available to trade 24 hours a day, five days a week – from 10pm (GMT) or 11pm (BST) on Sunday evening to 9pm or 10pm Friday night.

The best time of day to trade EUR will depend on which pairing you decide to focus on. As a rule, each pair will see the most movement when its sessions overlap. For example, the EUR/JPY pair would be more highly traded when both the European (London) and Tokyo forex sessions overlap.

Start trading euro pairs

You can trade the euro against other major currencies such as the US dollar, British pound and Japanese yen, as well as 80+ other pairs, via CFDs. Take your position on whether forex prices will rise or fall in the future, without having to buy the underlying asset.

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