PureFX

What Influences The Euro Exchange Rate?

Thu 7th June 2012

By Peter Lavelle

In this post I want to answer the question: what influences the euro foreign exchange rate? This might be of interest if you’re a UK resident planning to emigrate, or someone buying a home on the continent, and want to get the best euro exchange rate. Factors include economic releases such as retail sales and the unemployment rate, as well of course as the omnipresent debt crisis.

In brief, the things influencing the euro foreign exchange rate include the economic health of the continent, as well as its political prospects. In reality, the two tend to go hand in hand. For instance, of late output in EU manufacturing and services has lessened. This isn’t because the 350m inhabitants of the continent simultaneously became less productive. It’s because of fear about the future of the euro, which is hurting business confidence. That in turn hurts the euro exchange rate.

So if business confidence goes down, the euro goes down?

Right. The foreign exchange market favours regions in the best possible health, because this both means less risk to them, and better returns. If business confidence in the euro declines (for example) that suggests it’s not a good place to invest, which reduces the demand for euros. That in turn makes them less expensive.

And how does the debt crisis affect the euro?

In the same way. If it looks possible the euro might not exist in 12 months time, would you want to buy lots and lost of euros? Of course not. It would create all kinds of complications for you. Hence, since the onset of the debt crisis, the euro has lost a lot of value, as the markets flee to currencies that look more stable. The pound and US dollar for instance have both gained, as there’s no prospect of these currencies disappearing.

Could anything send the euro up?

For sure. If there’s good news from the Eurozone (such as the surprise announcement of the creation of the United States of Europe, bringing a swift and sudden end to the crisis) that would aid the euro no end. In addition, if the outlook deteriorates elsewhere, that can boost the euro too. If Scotland announced, for example, that it was leaving the UK, that would significantly weaken the pound, and be of huge benefit to the euro in consequence.

What’s going to happen to the euro in the future?

No one can know for certain, but in my opinion it’s likely to endure. This is because, in general, the political commitment to the common currency among European governments is huge, including in Greece and Spain. To abandon the euro would be a significant step backward, and something not done lightly.

Get in touch

I do hope this post has been useful.

If you have an questions not answered here, or would like to find out more, don’t hesitate to contact us at foreign exchange specialist Pure FX. One of our specialist dealers would be delighted to provide an in-depth personal response to your query, free of charge.