What is the Euro exchange rate?
Exchange rates have been in existence for hundreds of years. A currency is measured against other currencies. Before 1971, most currencies were pegged to gold. For example, $35 US dollars exchanged for 1 ounce of gold. That fixed rate system (Bretton Woods) broke down in the early seventies. Most currencies are now free-floating, meaning the value of a currency fluctuates over time.
Compared to many other currencies, the Euro is a relatively young one. The transition to the Euro from old European currencies like the Italian Lira and Deutsche Mark was completed sometime in 2002. Whilst young, the Euro has become a very important currency. It is the official currency 19 countries within the Eurozone.
Did you know that the Euro was the second most traded currency in the world after the US dollar? In 2019, a Bank of International Settlement surveyed revealed that around $2.19 trillion of the currency was traded every day. This figure is almost 3 times the daily figure for Pound Sterling. Moreover, around 20 percent of the world’s foreign reserves are in the Euro.
Associated with the creation of the Euro is the presence of the European Central Bank (ECB). Not only does the central bank manage the monetary policy inside the Eurozone, it also controls the issuance of the Euro. Policies of the ECB significantly impact the movement of the Euro. The current ECB president is Christine Lagarde.
In the next few years, we may see the creation of the ‘digital Euro’.
What Factors Influence the Euro?
The Euro is subjected to multiple factors impacting its current and future movements. Broadly speaking, four factors are always in the calculus of investors and traders:
- Economic factors – such as balance of payments, economic policies of major Eurozone countries, inflation, growth rates etc
- Interest rates – monetary policies and the level of interest rates
- Political factors – such as elections of major Eurozone countries
- Market Sentiment – such as positioning of the trades, technicals of rates etc
The issue with these factors is that their importance are time varying. Sometimes the market places more attention on interest rates, sometimes debt policies of major governments are a concern.
These days, the most important policies – economic and monetary – are related to the pandemic.
For example, the ECB has drummed up €1.85 trillion of asset purchases via the Pandemic Emergency Purchase Programme to sustain the Eurozone economies during the past year.
But despite these bond buying programs, the Euro has strengthened, especially against the US Dollar. Why? Because the Fed is printing even more, thus suppressing the value of greenback against other currencies.
These days, it is safe to say that no country wants a strong currency. This makes their exports uncompetitive. The Swiss Franc, for instance, was hyper strong in 2011 but the Swiss National Bank devalued it that year. The Japanese Yen was strong until the BoJ enacted a multi-trillion QQE that devalued the currency massively during 2013-14. Central bank interventions are always possible when a currency appreciates.
The Euro Rate analysis
Euro – Dollar (USD) exchange rate analysis & forecast
For the Euro, the EURUSD pair is the most important rate of all because the US is the largest economy in the world. The rate influences many other exchange rates.
Unlike most dollar pairs, this rate is often quoted per 1 Euro. So 1.20 means it takes 1.2 USD to exchange for one Euro. When it rises to 1.4 it means it takes more USD to exchange for one Euro.
The Euro-Dollar had a significant rebound over the past few quarters and propelled the rate above 1.2000 (see below). Note this is due to the persistent, and broad, US dollar weakness. Will the rate surprise is 2017 peak? Hard to say because that level is right at the bottom of the former range. When the Euro reaches 1.25 to 1.30, it will immediate register concerns for exporters because it makes European goods uncompetitive in the world.
Euro – UK Pound sterling (GBP) exchange rate analysis & forecast
Brexit is finally over. This removes one major uncertainty from most Sterling FX rates, including against the Euro.
Unsurprisingly, GBP has strengthened against the Euro this year (see below). The rapid vaccination of the population has also boosted the market sentiment for Pound Sterling. When viewed over the longer term, GBPEUR remains in a wide range at 1.200 to the upside and 1.050 to the downside. Watch for some correction price action at 1.200.
Euro Japan Japanese yen (JPY) exchange rate analysis & forecast
The EURJPY rate was heavily influenced by massive monetary operations from their respective central banks. In 2012-2015, the Yen devalued from 100 to 145 as the Bank of Japan enacted QQE. Then, it was the turn of the ECB to boost its bond buying program during 2015-2017. The Euro slumps from 145 to 115 in 2016.
Since then, the rate has moved within a 20-point range 115-135, with the latest breakout in favour of the Euro (see below). As the rate approaches its recent peak at 135, we anticipate some corrective moves from ceiling.
Jackson has over 15 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world’s largest institutions and hedge funds.
Expertise: Global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University.