After talking about AUD determinants yesterday, now we want to talk about another interesting topic, that is EURO determinants. Euro strengthens at the beginning of this week after the release of German's manufacturing data. It happened despite of Greek's mess and concerns about France. Why Germany? When at the same time, there are other countries in Eurozone.

After talking about AUD determinants yesterday, now we want to talk about another interesting topic, that is EURO determinants. It is commonly known that German's fundamental economy is the most observed indicator when it comes to forex trading with euro. For instance, Euro strengthens at the beginning of this week after the release of German's manufacturing data. It happened despite of Greek's mess and concerns about France. Why Germany? When at the same time, there are other countries in Eurozone.

influence
The Biggest
Euro is the currency used by European Union and served as national currency in 17 of 28 EU countries. Euro is the second biggest currency in the world after USD, despite not all of EU adopt it. It was adopted only by Austria, Belgium, France, German, Netherland, Greek, Italy, Spain, Ireland, Luxembourg, Malta, Portugal, Slovakia, Slovenia, Cyprus, Estonia, and Finland. Among those countries, Germany's central bank, Bundesbank, is the most respected due to its ability to control inflation until Mark became one of the most recognized currency. It was even said that ECB, European Central Bank, was built based on Bundesbank. It also is the largest owner of ECB shares.

When debt crisis exploded in the beginning of this year, public plays with opinions on which country should get out of Eurozone so that the condition could be stabilized: Greek (the most problematic), or German (the strongest one)? Of course, either is not the right answer. Backing down from an agreement as important as single currency is not a simple decision. If the Greeks out, then people will think that the same could happen to any other Eurozone countries unfortunate enough to be trapped in debt. If the Germans out, then Euro exchange rate will skydive.

In short, German is like a pillar sustaining the Euro. That's why, if you trade with Euro, pay attention to CPI, GDP, and Balance of Payment reports, as well as sentiment indicators like Ifo and ZEW. Ifo and ZEW index has strong influence on Euro because many thought they could do better at predicting future business condition than GDP. German economic influence in Eurozone made the market quite sure that if German's business prospects are good, then so will the rest of them.

The Averages
Another countries which have 'almost the same' influence are France and Italy. Reports from France and Italy has moderate impact on Euro. Why? This is because their current economic situation is not so good. Apart from that, their political situation is seen as not stable enough. These made the market doubt their reliability. It must be noted that politic-economy stability is also one of the exchange rate's determinant.

The influence of German, France, and Italy doesn't automatically mean that another 15 country has no hand in Euro. However, fundamentals like GDP, Inflation (CPI and HICP), and unemployment are some data that have significant impact on exchange rates. The difference is that reports from any other countries by themselves don't go far in influencing real economy, so the market tend to ignore them for the sake of Eurozone report as a whole. Even in that regard, they usually have less influence than German or the European Central Bank, ECB.
ecbThe Mysterious
ECB is right in the heart of Euro. Every words spoken by ECB headman is quoted by the mass media and directly affecting Euro. More than that, every monetary policy it takes will determine Euro's exchange rate against another currency. So long as they stay quiet, Euro's moves in the market will be predictable. But soon after ECB speaks up, we can almost see changes right away. However, it is quite difficult to predict what they will be doing later. Market players ordinarily only able to guess what they will do if something happened, like if inflation is lower that ECB's target.

With the Fed's Tapering boosting USD, most likely EUR/USD will slow down this week, and EUR/JPY rise considerably. This was because of these three things:

  • Ifo Index.
    Ifo index is German's business climate indicator. It is expected to increase, and there is very little chance it won't.
  • German PMI (and in lower impact, Italy and France)
    German PMI is also expected to rise. If the Ifo Index is good, then it is very possible.
  • Inflation and the probability of intervention by ECB.
    ECB President, Mario Draghi, yesterday mentioned that ECB probably will intervene if inflation is too low.

Pay attention to those three things, cause they could very well be determining Euro within the next few weeks.