The Euro (EUR)

The European Monetary Union (EMU), which is part of the EU, consists of 12 countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, and Spain. In 1999, these 12 countries adopted the Euro as their common currency.

The EMU is the world's second largest economic power with a Gross Domestic Product (GDP) of nearly 8 trillion Euros (or $12 trilion). The EMU is a service-oriented economy, which accounts for 72 percent of GDP. Manufacturing is the second largest segment of the economy.

Unlike the US, the EMU does not carry a large trade deficit or surplus.

Exports

Export markets are very important to the value of the Euro. The stability of its export markets directly affects the value of and demand for the Euro. A strong Euro will reduce the number of exports. A weak Euro will boost exports, which could contribute to a strong stock market.

The EU has five major export markets:

• United States
• Switzerland
• Russia
• China
• Japan

Imports

A strong Euro will boost imports because it makes foreign goods cheaper to Euro holders. A weak Euro will reduce imports, but boost exports.

The EU has five major import sources:

• United States
• China
• Russia
• Japan
• Norway

The European Central Bank (ECB) is the central bank for the 12 countries participating in the EMU. Its primary objective is to maintain price stability and reasonable growth.

The ECB holds bi-weekly meetings at which it can change policy. In practice, the ECB will only change rates or policies at meetings in which an official press conference is announced. These meetings are highly publicized and strongly affect the price movement of the Euro.

The following characteristics are important to know about the Euro as they affect the demand for the currency:

• The EUR/USD is the most liquid currency. In fact, all the major Euro crosses are very liquid.
• EUR/USD movement is used as a measure of health for both the US economy as well as the European economies.
• The Euro is known as the "anti-Dollar" because USD fundamentals dictate the Euro's movements.
• Germany, Italy, France, and Spain are the most important countries in the EU.
• Germany is the largest economy in Europe.
• Many traders are wary of the Euro and the ECB because of their short and unpredictable history.

Important economic indicators that directly affect the value of the Euro are (in order of importance):

• Preliminary GDP Report
• German Industrial Production
• Harmonized Index of Consumer Prices (HICP)
• IFO (Information and Forschung) Survey

Many of the US economic indicators, particularly the Nonfarm Payrolls Report, will cause strong price movements by the Euro. Watching both the US and European data is prudent for currency traders. Fed and ECB announcements are also critical to watch.