Top 7 EUR/USD Market Movers

The Euro Dollar is by far the most traded pair in Forex. It couldn't be otherwise, given the importance of the economies to which the two currencies in question refer: the United States and the Eurozone, which are the largest on the planet. This primacy is also evidenced by the turnover that, limited to Forex, the Euro Dollar moves: a figure even higher than the Italian public debt. Although the Euro Dollar is the subject of interest from analysts and experts, more than other pairs, it is not an easy pair to trade. To facilitate the work of traders, especially those with less experience, it is good to make a summary, category by category, of the market movers that affect the pair. Incidentally, market movers represent an element of fundamental importance, as, from the outside, in the form of news, they profoundly impact the relationship between currencies.

Monetary Policy

Monetary policy has a direct impact on the value of currencies. The reason for this is simple: central banks, which are the only ones entitled to decide on monetary policy, acting on the levers at their disposal, effectively modify the supply of currency, i.e., the amount of money in circulation. These levers are essentially two: interest rates and possible Quantitative Easing. The former determine the cost of money, while the latter consists of a program of purchases of debt securities which, in fact, injects liquidity into the system. When interest rates are raised, money "costs more", so there is a tightening of the money supply. In short, less money circulates and by the law of supply and demand, its value tends to rise. Therefore, if the European Central Bank raises rates, such an initiative should be interpreted as bullish on the euro dollar. If the opposite happens, the direction is bearish. This also applies, in reverse, to the Federal Reserve. If the American central bank increases rates, the Euro Dollar undergoes a bearish push; if it lowers rates, the push is bullish. Obviously, this is the theory. In practice, various factors intervene to delay or dampen the dynamics. For example, the degree of expectation of monetary policy. If investors expect a certain change in rates, they tend to behave as if this change has already been made, so when the rates are actually tweaked, the market has already discounted what it had to discount and no effects of any kind are detected. Currently, the monetary policies of the two central banks are divergent. The ECB persists in a very expansive policy, although it has started the Quantitative Easing to a natural death; the Fed is instead positioned on a path of progressive tightening.

Inflation

To understand the role that inflation plays in Forex, as a market mover, it is necessary to understand the modus operandi of central banks. In fact, they have a main objective: to keep prices under control. These should increase by 2% per year, or thereabouts (at least in the West, other central banks aim for different variations). Higher inflation would cause a loss of purchasing power and an erosion of financial investment returns at all levels. Lower inflation, or even deflation (prices fall), would effectively block the economy. How do central banks try to control inflation? With monetary policy, precisely. This means that whenever an inflation figure is published, traders receive a signal about the central bank's future initiatives, on the next monetary policy. Generally, to read the impact of an inflation figure, reference is made to the medium term. Therefore, not so much to the direction that prices are taking (are they rising or falling?), but to how much they are approaching or moving away from the 2% target. Thus, inflation that, in one sense or another, approaches the target, is considered a positive signal, and favorably impacts the currency. On the other hand, inflation that moves away should be interpreted in a bearish sense. Translated into reality, when US inflation moves away from 2%, the euro strengthens. When it approaches, however, the euro weakens. The same thing happens, but in reverse, with Eurozone inflation. If it approaches 2%, the euro appreciates; otherwise, it depreciates. Currently, the United States boasts inflation close to the target, while the Eurozone is also very far from it. Also read: What is Inflation and Why is it Important for Forex Trading.

Trade Balance

The trade balance is a parameter that, although snubbed by many, is decisive. Just like interest rates, in fact, they directly affect the money supply and therefore the relative value of a currency. But what is the trade balance? It is the difference between the value of exported goods and the value of imported goods. If this difference is negative, and therefore imports exceed exports, we speak of a deficit. If this difference is positive, and therefore exports exceed imports, we speak of a surplus. When the trade balance improves, and therefore the deficit decreases or any surplus increases, the reference currency gains an upward boost. If the trade balance worsens, the currency tends to depreciate. As for the United States, they have almost always lived in a deficit condition: the USA is an importing country. The matter becomes complicated, however, if we look at Europe. If the price policy is common, and inflation tends to be considered overall, this is not valid for the balance of payments. In short, in theory, the balance of individual member states should be analyzed. However, to acquire evidence from a trading perspective, it is possible to refer to the four largest economies in the Eurozone: Germany, France, Italy, Spain. Now, among this range of countries, there are two with a strong export vocation: Germany and Italy.

GDP

Gross Domestic Product is the market mover that is universally considered most able to synthesize the economic conditions of a country. This role is practically arbitrary, since GDP, by its very nature, says a lot but does not say everything. In any case, it is considered in this way and therefore should be understood as an extremely strong market mover. Obviously, when GDP increases, the reference currency gains a positive boost. When GDP decreases, the reference currency tends to depreciate. Currently, the United States is doing better than the Eurozone from this point of view, and has been doing so for more than a couple of years. It must be said, however, that the Eurozone is intensifying its growth path. With regard to Europe, which GDP should be considered? That of the Eurozone as a whole or that of the member countries? In general, both alternatives are valid. The advice is to monitor both the GDP of the Eurozone and that of the four most important economies which, we repeat, are Germany, France, Italy, Spain.

Labor Data

Under the category "labor data" there is a plethora of market movers. The rationale, however, is to consider the real economy as a priority for analytical and strategic purposes, and the real economy is made above all of work. In general, it is therefore necessary to keep an eye on the unemployment rate, the employment rate, changes in employment in an absolute sense (therefore with bare numbers, not as a percentage). Obviously, if the data improves, the currency appreciates. With reference to the United States, in addition to the classic unemployment rate, a market mover of fundamental importance is reported, which however is not given attention, not in the same forms at least, by European bodies: the change in non-agricultural employment, the so-called ADP. This parameter is completed by the Non-Farm Payrolls, i.e., the variation in the number of paychecks paid in all sectors except agriculture. From the point of view of work, the United States is doing much better than the Eurozone. The outlooks are however stationary in both cases, although this evidence should be read differently. For the United States, it might be fine as it is, since they are close to full employment. Various member countries of the Eurozone, on the other hand, and among these unfortunately is Italy, suffer from high unemployment which is falling too slowly.

Confidence and Sentiment

Various institutes, on both sides of the Atlantic, carry out official surveys about the sentiment of economic actors. They can be simple consumers, businesses, institutional investors. These are important data as they give an idea of how they will behave in the future, of the expectations that will move their actions. It is evident: if an individual believes that the economy will worsen, they will tend to save and in this way consumption decreases, the turnover of businesses decreases and consequently the real economy will worsen. The same psychological dynamic can be attributed to entrepreneurs and institutional investors. It is obvious that data expressing confidence produces an appreciation of the reference currency, and data that instead expresses a lack of confidence produces a depreciation. As for the Eurozone, it is good to look especially at German studies. It is precisely the data on the confidence of the Germans that has the greatest impact on the euro. In any case, it can be said that the Old Continent, at least for now, is pervaded by a cautious optimism, while in the United States the situation is stationary also from this point of view.

Enterprises

The market movers concerning companies in the main sectors are also decisive: manufacturing, services, construction. The most important market movers from this point of view are those of the PMI series. An acronym for Purchase Manager Index, in the economic calendars often known as the "purchasing managers' index", the PMI is generally structured around the value 50, which acts as a line of demarcation between pessimism and optimism. The index is also derived, in this case, with the survey method. The importance of the PMI is evidenced, in addition to the rich literature on the subject, also by a very trivial fact: the purchasing managers, who are the subject of the study, represent key figures, the only ones to always have a pulse on the situation, especially for what concerns the short and medium term future. They decide, in fact, the inputs on the basis of the outputs. It is evident: if the PMI is growing or maybe it is simply higher than expected, the currency benefits. If, on the other hand, the PMI is decreasing or in any case disappointing, the currency tends to lose value. From this point of view, both the Eurozone and the United States enjoy decent PMI indices, however above 50. Although, on closer inspection, a single PMI for the whole Eurozone is never published. Therefore, the advice is repeated: refer to the German, French, Italian, Spanish PMIs.