The euro is the currency of the 19 countries of the European Union which belong to the euro zone. It is the second most traded currency in the world behind the US dollar. In 2022, it accounted for for 31% of all foreign exchange transactions, with an average daily turnover of more than $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, accounting for an estimated 30% discount on all transactions, followed by EUR/JPY (4%), EUR/GBP (3%), and EUR/AUD (2%).

The European Central Bank (ECB), in Frankfurt, Germany, is the reserve bank of the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s main mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its main tool is the increase or decrease in interest rates. Relatively high interest rates – or the expectation of higher rates – will generally benefit the euro and vice versa. The Governing Council of the ECB makes monetary policy decisions at meetings held eight times a year. Decisions are made by the heads of the eurozone’s national banks and six permanent members, including ECB President Christine Lagarde.

Eurozone inflation data, as measured by the Harmonized Consumer Price Index (HICP), is an important econometric input for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, this forces the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to their peers will generally benefit the euro, as they make the region more attractive as a place where global investors can park their money.

Data releases assess the health of the economy and can have an impact on the euro. Indicators such as GDP, manufacturing and services PMIs, employment and consumer confidence surveys can all influence the direction of the single currency. A strong economy is good for the euro. Not only would this attract more foreign investment, but it could encourage the ECB to raise interest rates, which would directly strengthen the euro. Otherwise, if economic data is weak, the euro risks falling. The economic data for the four largest Eurozone economies (Germany, France, Italy and Spain) are particularly significant, since they represent 75% of the Eurozone economy.

Another important data release for the Euro is the trade balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after export goods, its currency will gain value solely from the additional demand created by foreign buyers seeking to purchase those goods. Therefore, a positive net trade balance strengthens a currency and vice versa a negative balance.