Fundamental Analysis – Explaining the Eurozone Economic Data

The Eurozone economies form one of the largest economies in the world. The single market, as it is called, is not only the Eurozone, though. To be more exact, the European Union (EU) was formed with the objective of avoiding future conflict between European countries after the disruption caused by World War II. Moreover, because the world population is living in a globalised environment, economic competitiveness is difficult to realise for a relatively small single entity. Exports are not competitive, and economies of scale cannot be attained. Treaties are difficult to negotiate as well. It is  different, though, in a union. There are 27 countries that make up the single market (now that the United Kingdom has decided to leave the European Union) and every country in the world wants to have access to it. Why? because there are over 50 million people living in it, and most of those countries have a higher per capita income level than in many other parts of the world.

What Data Matters for the Eurozone?

The pillar for interpreting the Eurozone economies and the way the euro, the common currency, is moving is the central bank. The European Central Bank meets on a regular basis to assess the shape of the Eurozone economies, and to set the interest rate and the monetary policy for the period ahead.

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The ECB Interest Rate Decision

Every 6 weeks, on a Thursday, right when the North American session starts, the ECB releases its interest rate decision. Usually this is a single statement, but sometimes it is being followed up by bits of information from the upcoming press conference. The release is called the Minimum Bid Rate, and this is the release every long or short trader, every bull or bear who trades the euro, needs to consider. The rate decision is usually priced in the market, but this still makes the event one of the most volatile in the entire Forex market.
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This is because 45 minutes later, a press conference follows the interest rate release. Most of the time, the press conference is even more important than the interest rate level itself.

The ECB Press Conference

The ECB holds a press conference after every meeting. That means that, in total, eight press conferences are held in a year. It is not the same everywhere in the world. In contrast, the Federal Reserve of the United States does not hold a press conference after every Federal Open Market Committee (FOMC) meeting. The ECB press conference is closely scrutinised by market participants who want to form an educated guess about the next step in the ECB monetary policy. The conference has two parts: in the first part, the president reads the Governing Council’s statement, while the second part is dedicated to questions and answer from press representatives. Both events trigger big moves in the euro pairs, with Forex traders being challenged to the max. While it is a risk event, though, it presents a lot of opportunities for prepared traders.

HICP Inflation

The ECB has only one mandate: to keep inflation below or close to 2%. A normal level, or an appropriate one, is when inflation is around 1.8%, 1.9%, or a maximum of 2.2%. At these rates, the Eurozone economies are growing, on average, at a steady but normal pace, and there is no risk of overheating. The more inflation deviates from these values, the more aggressive the central bank’s response will be. The index of harmonised inflation used is the Harmonised Index of Consumer Prices (HICP). While the Fed in the United States prefers to look at the core inflation data, the ECB looks at the HICP, at least when it comes to fulfilling its mandate. Inflation figures are released monthly, but quarterly and yearly data is also considered. On any deviation from the expected figure, traders will prepare for the next ECB meeting when a reaction is expected, either in the form of a rate change (hike or cut), or in the form of a change in the language.

PMIs

PMI stands for Purchasing Managers’ Index and, in the Eurozone, they are calculated for two sectors: the services and the manufacturing ones. The further the PMI releases are from the 50 level (to the upside), the better for the sector. Any print below the 50 level is bearish for the euro, as it shows that the sector is contracting. As a rule of thumb, the Eurozone is not a manufacturing economy anymore, so services matter the most, at least in western European economies. Nevertheless, the German Factory Orders, for example, is a manufacturing indicator that shows the strength of the biggest manufacturing powerhouse in Europe: Germany. When this release misses, it won’t be long until the PMI misses the 50 mark too.

GDP (Gross Domestic Product)

The GDP shows the total value of the goods and services produced by the Eurozone economies. The bigger the number, the better for the economy, and the more bullish for the currency. Economic growth is the equivalent of a higher currency, as, in the end, it all comes down to how an economy is performing. Strong GDP releases imply that the economy is doing well, jobs are being created, average hourly earnings are rising, disposable income is rising as a consequence, and as a result prices will rise due to pressures from consumer spending. This in turn leads to higher inflation, and higher inflation leads to the central bank, the ECB in this case, raising the rates. Higher rates are positive for a currency, and in this way the circle is completed, with the same conclusion reached: higher rates lead to higher currency values, while lower rates lead to lower currency values.

German Economic Data

Germany is the engine of European growth and, as such, everyone is looking at how it is performing. The following is the Germany economic data that matters:

Other Important Events

European summits are held regularly in Europe, and they are subject to a lot of volatility when markets open the following Monday. Depending on what’s on the agenda, the gaps at the opening can be big. The ECB president testifies in front of the European Parliament, explaining the reasons for the current monetary policy stance and what the are expectations for the period ahead, and answers questions. Such a testimony results in the euro being more volatile than normal. Despite the United Kingdom leaving the European Union, its members push for further integration and more unity. Because of that, look for the euro and the Eurozone data to play an important role in the Forex market in the long term, no matter what the short- to medium-term drivers are.

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