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 being called, is not only the Eurozone, though. To be more exact, the European Union (EU) was formed on the pillars of avoiding future conflict between European countries as the Word War II was the reason for this union. Moreover, because the world is living in a globalized environment, economic competition is difficult to be realized as a single entity. Exports are not competitive, and economies of scales cannot be reached. Treaties are difficult to be negotiated as well. It is different, though, in a union. There are twenty-seven countries that make up the single market (now that the United Kingdom decided to leave the European Union) and every country in the world wants to have access to it. Why? There are over five hundred million people living in it, and most of those countries have a higher income per capita level than in many other parts of the world.
What Data Matters for the Eurozone?
The pillar in interpreting the Eurozone economies and the way the Euro, the common currency, is moving, is the central bank. The European Central Bank is meeting 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.
The ECB Interest Rate Decision
Every six weeks, on a Thursday, right when the North American session starts, the ECB is releasing the 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 that 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.
This is because forty-five minutes later, a press conference is following the interest rate release. Most of the times, the press conference is even more important than the interest rate level.
The ECB Press Conference
The ECB is holding a press conference after EVERY meeting. That means that, in total, eight press conferences are to be held in a year. It is not the same everywhere in the world. In contrast, the Federal Reserve of the United States is not holding a press conference after every FOMC (Federal Open Market Committee). The ECB press conference is closely scrutinized by market participants that 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 one 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, it is showing a lot of opportunities for the prepared traders.
The ECB has only one mandate: to keep inflation below or close to two percent. A normal level, or an appropriate one, is when inflation is around 1.8%, 1.9%, or maximum 2.2%. At this pace, the Eurozone economies are growing, on average, at a steady, but normal pace, and there is no risk of overheating. The more the inflation deviates from these values, the more aggressive the central bank’s response will be. The HICP is the harmonized inflation. While the Fed in the United States prefers to look at the core inflation data, the ECB has to look at the HICP, at least when it comes to fulfilling the mandate. Inflation is released monthly but also quarterly and yearly data is considered. On any deviation from the expected number, 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 the language to be changed.
PMI’s stand for Purchasing Managers Index and, in Eurozone, they are calculated for two sectors: the services and the manufacturing one. 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 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 West 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 will miss 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 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 doing. Strong GDP releases imply the economy is doing good, jobs are created, average hourly earnings are rising, disposable income is rising as a consequence, and as 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, to raise the rates. Higher rates are positive for a currency, and just like that, the circle is completed, with the same conclusion: higher rates lead to higher currency values, while lower rates lead to lower currency values.
German Economic Data
Germany is the engine of the European growth and, as such, everyone is looking at how it is performing. Germany economic data that matters is:
– German Factory Orders – shows the shape of the manufacturing sector.
– The IFO. It is a survey of various businesses in Germany, from different sectors, and the higher the number, the better for the economy.
– The ZEW. It is still a survey of business managers that gives an idea about the health of the economy.
Other Important Events
European Summits are held constantly in Europe and they are subject to a lot of volatility when markets are opening next Monday. Depending on what’s the agenda, the gaps at the opening can be big. The ECB President is testifying in front of the European Parliament, explaining the reasons for the current monetary policy stance, what are the 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.
Recommended Further Readings
- Forex Trading – Explaining the Concept
– What is forex trading, generalities about trading the currency market.
- Why Trading Forex?
– Advantages and disadvantages of trading the currency market, what are trader’s expectations and what is a realistic approach to follow
- Forex Trading Sessions and Their Importance
– Explaining the differences between the three Forex trading sessions, what are their importance, ranking, etc.
- Forex Brokers Types – ECN or STP?
– What is ECN, STP, how d- brokers deal with client’s orders, advantages, and disadvantages of the tw- types.
- What Makes a Good Forex Broker?
– Things to consider when deciding what broker to trade with. What are the factors that weigh the most in the decision-making process?
- Why Trading with a Regulated Forex Broker?
– What is regulation for a brokerage house, why it is important, things to look for, how to check if the broker is telling the truth, etc.
Other Educational Materials
- External imbalances in the eurozone. Chen, R., Milesi-Ferretti, G.M. and Tressel, T., 2013. Economic Policy, 28(73), pp.101-142.
- “The “greatest” carry trade ever? Understanding eurozone bank risks.” Acharya, Viral V., and Sascha Steffen. Journal of Financial Economics 115, no. 2 (2015): 215-236.