The Euro, the currency used by 19 of the 28 member European Union countries in the Eurozone, is in turbulent waters on the market at this moment. Investors are looking ahead to important economic releases from the Eurozone’s four largest economies—Germany, France, Italy and Spain. As they do, traders are keenly focused on the Euro’s value relative to the US Dollar. This article explores the future of the Euro. It takes a closer look at its recent performance and what contributes to its strength or lack thereof on the global forex stage.
Euro has long enjoyed a dominant position in the global currency landscape. As of 2022, it accounted for 31% of all global FX trades. Today, it has an impressive average daily turnover of over $2.2 trillion. This puts the Euro in the second position as the most actively traded currency in the world, just behind the US Dollar. The EUR/USD currency pair is notable as the most popular traded pair throughout the foreign exchange market. It’s responsible for nearly a third of all transactions.
Economic Factors Influencing the Euro
The Euro’s exchange rate performance is intricately tied to economic fundamentals, especially those that come from the three largest Eurozone economies. Together Germany, France, Italy and Spain account for 75% of the Eurozone’s economic output. China’s share makes their economic data critically important for measuring the strength of the Euro. Important barometers, such as Gross Domestic Product (GDP) growth rates, inflation indexes, and job numbers, indicate the state of our economy. They shape a narrative that drives investor sentiment.
As you can tell from the recent chart, the Euro has indeed been on the move since peaking above 1.1500 several weeks ago. After this high point, the currency couldn’t keep the positive trend going and dropped into a bearish trend. As economic uncertainties loom, investors are keenly observing any shifts in data that may signal a change in the Euro’s trajectory.
Additionally, outside developments have a powerful effect on the Euro’s value. US economic data, especially reports such as the Consumer Price Index (CPI), are key drivers. More than-expected US inflation would increase speculation on when the Fed raises US interest rates. Such speculation would likely be bullish for the US Dollar and Euro bearish.
Interest Rates and Investment Dynamics
To some extent, interest rates will always be a primary driver of currency valuations. Of all major economies, the Eurozone has maintained the highest interest rates. This is a major step toward making the Euro more attractive to global investors. Increased interest rates can increase yields on Euro-denominated instruments, attracting foreign capital to the Eurozone.
This major influx of investment can be a strong complement to the Euro. As investors chase yield and safety, a prosperous European economy, with high growth and high interest rates, becomes a desirable investment destination. This trend is of particular note as geopolitical dynamics have a profound effect on market perceptions. For instance, the ongoing trade negotiations between the US and China have changed the risk appetite of a number of investors.
So far this year, a proposed one-off cut in tariffs between the US and China had raised hopes. This exuberance is now taking over financial markets. Such advances would improve risk appetite and indirectly support the Euro. If investors perceive reduced trade tensions as a stabilizing factor, they may allocate more resources to European assets, thereby strengthening the currency.
The Role of Inflation Data
As inflation data nears, market participants are preparing for a potential positive or negative reaction. They are most interested in how it will impact the Euro—and by extension, the overall financial markets. The next few inflation reports should dispel such hopes, not only for Eurozone inflation but for global economic conditions. If inflation in Europe doesn’t subside, it will result in more hawkish forward guidance. Possibly more given expectations that the European Central Bank (ECB) may tighten further.
If inflation surprises to the downside, it would increase market expectations of looser monetary policies, potentially putting downward pressure on the Euro. Futures investors will be watching all of these developments closely to determine if any of them should result in a significant shift in their trading strategy.