The euro was introduced in early 2000 as a shared currency for 12 member countries, and by 2019 the Eurozone had expanded to include 19 nations. These economies, particularly the smaller ones, are highly interconnected, which means that economic or political developments in countries such as Germany, France, Italy, or Greece can quickly influence the value of the common currency.
It is important to distinguish between the Eurozone and the European Union. The Eurozone represents a deeper level of economic integration, as its members not only use the same currency but also follow a unified monetary policy set by the European Central Bank. The European Union, by contrast, includes more countries, not all of which have adopted the euro.
While some EU members have not yet transitioned to the euro, the long-term objective of the region’s development remains wider adoption and circulation of the single currency.
The Eurozone debt crisis, which peaked around 2011, significantly disrupted these ambitions. Since then, doubts have persisted about whether such diverse economies, ranging from Germany to Greece and holding very different fiscal views, can sustainably operate under a single currency.
This uncertainty has contributed to a notable decline in the euro’s share of global central bank reserves, despite the fact that more than 35% of worldwide trade transactions are conducted in euros.
At the same time, the euro has become increasingly sensitive to political developments in countries such as Italy and Greece, where high debt levels and recurring tensions with EU authorities have raised concerns. These factors often fuel fears of fragmentation within the European Union, prompting traders to take short positions on the euro in response to heightened political and financial risk.
It is also worth remembering how severely countries such as Spain, Portugal, and Italy were affected during the 2008 financial crisis. Greece went through multiple debt restructurings, and Italian government bonds were at times viewed by investors as highly speculative. Despite this prolonged period of stress and uncertainty, the euro remained intact.
Although the currency experienced sharp and extended fluctuations, its exchange rate against the US dollar eventually returned to levels similar to those seen in the early years of the euro’s circulation. This demonstrated the resilience of the single currency, even under significant economic and political pressure.
In addition, the transparency of the European Central Bank’s actions makes fundamental analysis more predictable over time. With experience, traders learn how to read between the lines of central bank statements and understand how specific wording can influence price movements in currency pairs.
Particular attention should be given to monetary policy decisions from both the ECB and the US Federal Reserve. These institutions meet roughly every six weeks to decide on interest rate changes and update their economic outlook. The official language used in these announcements is usually carefully worded and neutral in tone.
While it may appear vague or obvious to less experienced traders, seasoned market participants are able to interpret subtle changes in phrasing and compare current statements with previous ones to gauge shifts in policy direction.
Another major driver of euro volatility is the statement made by the head of the European Central Bank during the press conference, which typically takes place about 45 minutes after the official decision is released.
Since 2019, the US Federal Reserve has also introduced follow-up speeches roughly 30 minutes after publishing its decision and updated economic forecasts. Markets react strongly to shifts in expectations, and in many cases the most impactful information comes from these explanations and comments rather than the decision itself. Central banks refer to this approach as the management of expectations.
So what actually happens during these press conferences?
Journalists from around the world question the head of the ECB about the current economic conditions in the Eurozone, the central bank’s future intentions, and any possible adjustments to monetary policy. These discussions often provide additional context that is not fully reflected in the initial policy statement.
The most accurate and up-to-date insights usually come from watching the press conference live. Paying close attention to statements made by Christine Lagarde and Jerome Powell, and observing how the EUR/USD pair reacts in real time, can help you clearly see the connection between central bank communication and market movements.
Market reactions during press conferences can be sharp and sometimes unexpected. It’s important to remember that behind every trade there is a person, and human behaviour is influenced by emotions, fears, and expectations.
Quite often, once traders have fully digested and reassessed the statements made by ECB officials, the market may experience sudden corrections or strong follow-through moves.
Inflation is another key factor influencing the euro, as the ECB is committed to keeping inflation close to 2%, or slightly below that level.
The main takeaway from this lesson is that Forex market movements are strongly driven by interest rate decisions and by the actions central banks take to control inflation and steer economic stability.
When actual inflation in the Eurozone, or even forward projections, moves away from the ECB’s 2% target, it directly influences interest rate decisions and the tone of central bank communication.
The euro typically gains strength when the ECB raises rates or signals that a rate increase may be coming. In contrast, the currency often comes under pressure when rates are cut or when officials suggest they are prepared to ease policy.
So why does the ECB set interest rates in the first place?
The central bank’s role is to strike a balance between controlling inflation and supporting economic growth. It must carefully manage how quickly inflation rises or falls while adjusting borrowing costs accordingly. You may also notice that analysts usually refer to “interest rates” in the plural rather than a single “interest rate,” reflecting the range of rates and tools central banks use to guide the economy.
Many traders are not aware that during each policy meeting, the European Central Bank actually sets three different interest rates. Without going into technical detail, it is important to understand that this multi-rate structure allows the ECB to influence various parts of the economy in different ways.
The ECB monitors inflation primarily through the Harmonised Consumer Price Index, which is published on a monthly basis. A preliminary estimate is usually released on the last working day of the month, followed by a final figure in the middle of the following month. Large deviations from forecasts are uncommon, but when they do occur, they often trigger sharp movements in the euro across multiple currency pairs.
Traders keep a close eye on both headline inflation figures and Core CPI, which excludes volatile components such as food and energy prices.
That said, the ECB and the Federal Reserve differ slightly in their approaches. The ECB places more emphasis on overall inflation, while the Fed focuses more heavily on core consumer price data.
As with interest rates, inflation is a key driver of currency movements. However, market reactions are often limited, as analysts are generally able to anticipate inflation trends with reasonable accuracy by analysing other available economic data.
Changes in business activity indicators, particularly Purchasing Managers’ Index data, also have a strong influence on the euro.
Purchasing managers are considered a valuable source of timely information on new orders, production levels, and inflation trends. These reports are based on surveys that assess whether business conditions have improved or worsened compared to the previous period.
Readings below 50 indicate a contraction in activity, while values above 50 signal expansion.
For traders, it is just as important to compare the actual figures with market expectations, as shifts in expectations are often what drive price movements.
In the European Union, PMI data is published separately for the manufacturing and services sectors. In addition, the survey provider Markit releases individual PMI figures for major EU economies, which are closely watched by market participants.
While the service sector carries more weight in the US and the UK, both manufacturing and services indicators are equally important for the Eurozone.
Traders should focus not only on the overall EU PMI figures, but also on national data from Germany and France, which are regarded as the core economies of the region.
So how can PMI data be applied in trading? A reading below 50 signals a contraction in business activity and can serve as an early warning of a potential recession. Readings above 50 indicate economic expansion.
For traders who react to news, the key factor is how much the actual figure differs from market expectations. Results that exceed forecasts often strengthen buying interest in the euro.
On the other hand, PMI figures that fall short of expectations can trigger increased selling of the single currency against its main counterparts and may also add downward pressure on European equity markets.
