The Euro enjoys high liquidity. Additionally, all of the Euro crosses are characterized by great liquidity. The EUR/USD currency pair is the most liquid one among all others.
In January 1, 1999 the introduction of the Euro as an electronic currency was made. This is the time when the pre-EMU currencies were replaced by the Euro. Only the Greece currency was not converted at this time, but instead in January 2001.
The relatively new nature of the Euro has attached to it some risks that cannot be found in other currencies. One of them stems from the ECB, which is viewed as an untested financial institution. The risks come from the fact that the ECB has a short history and has not yet proven its efficacy and efficiency. Since the bank has no long history, market participants don’t have background information regarding the way it will act under different market conditions.
Another risk associated with the Euro concerns its susceptibility to political and economic uncertainties. This risk stems from the fact that the Euro is the official currency of 12 member states and a change in any one country is reflected in its value.
The Euro sentiment is indicated by the spread between US Treasuries and Bunds. In order to gauge any potential euro exchange rate changes, the ten-year government bonds should be referred to. Euro movements can be indicated by the differential between the 10-year US government bond and the 10-year German Bund. The Euro value is said to be increasing if the Bund rates are greater than the treasury rates and an increase in the differential is observed. Additionally, if the spread widens it may indicate the increase in the value of the EUR. Alternatively, the value of the EUR is decreasing if the differential falls or a tightening of the spread is observed.
The Euribor Rate
The Euribor rate (also known as the Euro interbank offer rate or the 3-Month Interest Rate) represents the interest rate at which large banks offer to one another interbank term deposits. The Eurodollar futures rate and the Euribor futures rate tend to be compared by forex market participants. Eurodollars represent deposits that are placed outside the US and are held in US dollars.
When the spread between the Euribors and the Eurodollar future increase, investors tend to direct their assets to European fixed income assets. This is generally so, because investors are attracted by the high yields of assets. On the other hand, if this spread decreases, investors divert their attention from the European assets. This will eventually result in a decrease in the money flows into the EUR.
The movements in the EUR/USD are also influenced by the made Mergers and Acquisitions (M&A). The M&A activity has significantly increased among the EU and the US, which has led to an impact on the value of the EUR on short term basis.