Forecasting Euro Rate Fluctuations

In less than a year the Euro lost 21 percent of its value against the U.S. dollar. It then recovered to its previous level, before gaining approximately 10 percent against the Greenback during the first ten months of 2010. Is it normal to see such movements occur in a matter of months, and if so, how do we explain such fluctuations in the Euro exchange rate? Firstly, yes, it is usual to see such fluctuations. This is due to the nature of the foreign exchange market, which is driven by both fundamental economic indicators, and the market mood that often is influenced by psychological factors rather than pure logic.



So how can we relate these two factors to that of Euro rate fluctuations? One of the fundamental factors that forced the Euro rate down was the huge public debt of some European countries, namely Greece, which provoked fears relating to the future stability of the euro-zone and the currency exchange rate of the Euro. The market reacted accordingly and the Euro rate dropped against all major currencies due to fears that the entire euro-zone would fall victim to huge public debts. The public debt fuelled the mood of the market to bet against the Euro. Speculators saw a chance to profit from the weakened single European currency. To counteract the mood of the market, the European Central Bank reacted fast and the European Union prepared a bailout package for Greece. This reassured investors that all European institutions were ready to engage to save the Greek economy. Recently, a similar scenario occurred in Ireland, which also accepted a bailout to save its commercial banks.



The market mood was reversed shortly after the European Union demonstrated that all necessary measures would be taken to support the Euro and Brussels, and all euro-zone member-states stand together so as not to leave a single EU member-state to go bankrupt.



Thus, despite some bad signals related to the state of the euro-zone finances, the Euro managed to level its exchange rate against the other major currencies. Many economists commented that this was a test of the European readiness to act together in favour of its currency, adding that more of such tests are bound to occur in the future.



You can utilise forecasting tools to predict the movement of the Euro rate, however, none of these tools is able to evaluate the impact of the investors' mood on the foreign exchange market. At present, the Euro is in much more favourable position from a psychological point of view. Europe's economy is strong while the American economy is recovering slower than expected. The European Union acts with solidarity, with the European Central Bank sending strong signals that it will defend the Euro to the end. On the other hand, the fundamentals show that Europe outperforms the United States in terms of pace of economic growth following the start global financial crisis. Another reason of why the U.S. dollar is in a weaker position against the Euro is that the U.S. stock market is also performing better than expected. This forces investors to look for higher returns on stocks and as a result, are not buying dollars.



At the same time, the United States is experiencing the highest level of unemployment since the Great Depression in the 1930s, with the Democrats of President Barack Obama losing mid-term elections in the Congress.



Euro rate fluctuations are related to fundamental factors as well as unpredictable market moods. However, keeping up to date and in tune with economic indicators and political news, is a sure way to learn to successfully forecast the Euro rate.



Connie Martine writes articles relating to the financial services. If you need to make a large or regular overseas payment consider the help of a Euro exchange rate specialist.