Have you ever wondered why a single Twitter announcement or a central bank speech could change the value of the EUR to USD exchange rate within minutes?

The EUR to USD exchange rate is influenced by a web of economic forces, from central bank policies to global trade tensions. Whether you’re sending money abroad, travelling between Europe and the US, or running a multinational business, understanding this exchange rate can help you make better financial decisions. Exchange rate fluctuations can impact cross-border trade, business profit margins, and pricing strategies. Currency conversion rates can also influence travellers' trip affordability. Investors closely monitor this pair for trading opportunities, particularly in the foreign exchange market.

So, how does it work, and what should you watch for in the coming months? Let’s explore!

What is the EUR to USD Exchange Rate?

In layman’s terms, the EUR to USD exchange rate is the number of US dollars you will receive for one euro. The pair’s trajectory not only reflects the economy of the Eurozone or the USA, but also reflects the global economic climate. The euro designates the collective strength of 19 European countries, and the US dollar represents the largest economy in the world. Due to its influence on international trade, central bank policy, and cross-border transactions, the EUR/USD pair is closely monitored by economists, investors, and policymakers.

Factors Affecting the EUR to USD Exchange Rate

Different economic, political, and global factors determine the euro and US dollar exchange rates. Understanding how these factors can manipulate currency rates can help you predict future movements and manage currency risk more effectively.

Economic Factors

Economic factors include central bank policies, interest rate differential, inflation figures, GDP and other growth metrics. These major economic indicators are crucial as they not only reflect the country’s financial health but also determine the currency’s demand & supply metrics in the open market.

Central bank policies:

Central bank policies are crucial for balancing the country’s economic growth and inflation rates. By modifying interest rates, the central banks can control inflationary pressure and stimulate financial activities within and outside the country. While making interest rate decisions, banks ensure the PMI levels as well as the labour market of the country. A recent example is the ECB bank’s latest interest rate decision, where banks have reduced the deposit facility rates to 3.25%. While the decision aligned well with market expectations, it was also a strategic move against the fears of a potential recession.

Interest Rate Differentials:

Interest rate differential is the difference in interest rates between two investment vehicles, such as two currencies. The EUR/USD exchange rate is highly sensitive to the interest rate difference the European Central Bank (ECB) and the Federal Reserve (Fed) opted for, triggering the exchange rate volatility between the EUR/USD pair. For example, suppose the Fed increases the interest rates. In that case, US dollar-denominated assets will produce more returns, attract more investors, and raise the demand for the USD and vice versa for the Euro demand.

Inflation Rates:

Inflation is the measure of change in the price of goods or services over a period. In simpler terms, inflation erodes a currency's purchasing power. Higher inflation reduces the currency’s value in the open market. Hence, if the inflation in the Eurozone rises compared to the US, investors may withdraw their Euro investments as their maturity value can be lower than initial prices. While central banks can tighten interest prices to combat inflation, the persistent inflationary pressures could lead to a weaker currency in the long term.

GDP Growth and Employment:

Strong economic growth and robust employment numbers in the Eurozone or the US can lead to currency appreciation. For instance, if US GDP growth outpaces the Eurozone's, the dollar may strengthen against the euro. Employment figures mirror the labour market conditions, defining the current industrial and service market conditions. Lower unemployment rates denote that the economy is producing near its total capacity, which can lead to higher wages and higher living standards, resulting in better consumer spending.

Political Factors

Political factors combine two significant factors: change in leadership and policies. Events like elections or government policies inject uncertainty into the country's economic outlook, affecting the market sentiment around the home currency.

Elections and Policy Changes:

Any major political events, such as elections and changes in government policies, feature uncertainty around the country's economic outlook, leading to volatility in the EUR/USD exchange rate. For example, the upcoming US presidential election keeps investors at bay as the ruling party, either Kamala Harris or Donald Trump, may alter trade and fiscal policies, creating volatility in dollar prices.

Trade Policies:

The euro-to-US dollar exchange rate emanates from the strength of the trade relationship between the Eurozone and the US. Trade imbalances, tariffs, and sanctions can influence the demand for each currency. For instance, a trade surplus in the Eurozone—where it exports more to the US than it imports—can strengthen the euro, while US trade tariffs could weaken it.

Safe-Haven Currency:

The US dollar, aka Greenback, is considered a safe-haven currency. So, investors will move to USD during global uncertainty or financial crises to safeguard their investments. The finest example of this was the COVID-19 pandemic, during which the whole world encountered a pause in the global economy; the dollar strengthened against the euro as investors sought refuge in the USD. In contrast, the euro tends to be viewed as a riskier asset, mainly due to political fragmentation and economic imbalances within the Eurozone.

Global Risk Sentiment

While economic and political factors echo issues within the country, global risk sentiment includes factors like wars, disasters, or commodity prices, which are not solely within the control of currency. A slight change in global sentiment could cause currency market volatility.

Geopolitical Events:

Geopolitical risks, such as trade tensions, wars, or natural disasters, can significantly impact the EUR/USD exchange rate. For instance, the ongoing conflict in the Middle East has created a huge disruption in oil prices, hinting at a global slowdown, yet the dollar prices are continually increasing as marketers shift to the dollar, moving away from risk-sensitive currencies.

Key Milestones in the EUR to USD Exchange Rate: A Brief Journey Through Time

Since the euro's inception in 1999, the history of the EUR to USD exchange rate has had its fair share of highs and lows. Over the years, this currency pair has seen dramatic fluctuations driven by financial crises, central bank policies, and geopolitical events. From the euro’s unsteady beginnings to its rise as a global powerhouse, each shift in the exchange rate reflects vital moments in the evolving relationship between the Eurozone and the US. By understanding these pivotal points, you can better grasp the forces shaping today’s markets and anticipate what lies ahead for this crucial currency pair.

The Birth of the Euro: A Rocky Start (1999):

When the euro officially launched in 1999, it opened at 1 EUR = 1.17 USD, full of promise and optimism. But things didn’t go as planned. The euro slipped almost immediately, falling below parity to 0.82 USD in the early 2000s. Why? Many investors were unconvinced about whether this new currency could hold its ground or not, especially compared to the robust US dollar backed by a booming economy.

Early 2000s: The Euro Fights Back:

Despite its shaky beginnings, the euro’s story didn’t end there. The tables turned as the dot-com bubble burst, hindering the US economy. The euro gained strength, and by 2004, it was trading around 1.30 USD. Europe’s steady economic performance and US economic struggles helped lift the euro, turning it into a global powerhouse.

The Global Financial Crisis: A High, Then a Fall (2008):

But in 2008, the global financial crisis hit. The euro skyrocketed to an all-time high of 1.60 USD as the US encountered its biggest economic downturn in decades. Investors were exiting from the dollar and turning to the euro, but the euro's rise was short-lived. As the crisis spread to Europe, the euro started to sink, and concerns about the European Bank’s stability took centre stage.

Eurozone Debt Crisis: The Euro’s Toughest Test (2010-2015):

If the 2008 financial crisis shook things up, the Eurozone debt crisis that followed in 2010 took it to a new level. Countries like Greece, Italy, and Spain were on the brink, weighed down by massive debts, and for a while, it seemed like the euro might not make it. Investors were spooked, and the EUR/USD exchange rate reflected that fear, dropping sharply toward parity, hovering around 1.05 USD by 2015. In response, the European Central Bank (ECB) had to intervene with quantitative easing—a policy move designed to flood the market with liquidity and keep the Eurozone economy from spiralling into deeper trouble.

Brexit and Beyond (2016-2020):

The shock of the 2016 Brexit vote sent waves through Europe, and while it hit the British pound hardest, the euro wasn’t spared from the uncertainty. Investors weren’t sure what would happen next, keeping the EUR/USD fluctuating between 1.10 USD and 1.20 USD as the dust settled. Then, just when things started to stabilise, the COVID-19 pandemic turned the global economy upside down. At first, this led to a stronger US dollar as investors rushed to the greenback's safety. However, as the Fed and ECB introduced stimulus packages, the euro regained some ground.

Inflation, Energy Crises, and Today (2022-2023):

Fast forward to recent years, and inflation has dominated the story. In 2022, the Federal Reserve took an aggressive stance, hiking rates to tackle rising prices, which boosted the dollar’s strength. The ECB, on the other hand, was slower to act, resulting in a weaker euro. Throw in the energy crisis triggered by the war in Ukraine, and the euro hit some rough patches. Looking ahead, both central banks are carefully navigating through economic uncertainty, leaving the EUR/USD exchange rate finely balanced and keeping market watchers on their toes.

But what will determine the EUR to USD exchange rate in 2024? The central bank’s decision, US presidential elections, or rising geopolitical risk? To get a better idea, you need to watch upcoming economic or political events.

Key Events to Watch for EUR/USD in 2024

In the remaining months of 2024, here are a few key events that one should watch to forecast the currency exchange rate for EUR to USD correctly.

ECB and Fed Meetings:

In November and December 2024, the European Central Bank and the Federal Reserve will conduct their meetings, making final monetary policy decisions for the year. During these meetings, they may adjust interest rates, discuss inflation control strategies, or implement new economic policies. While inflationary pressures are under control in the Eurozone, the ECB is widely anticipated to cut the interest rate again, weakening the euro. On the other hand, better economic data from the US has dismissed bets around higher interest rate cuts by banks, supporting the dollar.

Pro Tip: If you expect the ECB to cut rates, consider converting euros into dollars before the decision is announced to avoid losses due to a weaker euro. If you're converting dollars to euros, waiting until after the ECB cuts rates could give you a better exchange rate.

Political Elections:

Elections in key European nations or the US are often a source of currency volatility. For example, as the 2024 US presidential election approaches, uncertainty surrounding the outcome could lead to fluctuations in the US dollar, driven by market speculation over future economic policies. Similarly, upcoming elections in Germany or France may influence the euro, with political shifts or unexpected results adding pressure on the currency as investors react to changes in government agendas and economic strategies.

Pro Tip: If you need to convert large amounts of currency during an election period, consider splitting your conversion over time to hedge against potential market volatility. Keep a close eye on polling data and election results to anticipate rate movements.

Inflation and Employment Reports:

The Eurozone and the US release monthly inflation and employment data that provide critical insights into future monetary policy decisions. Both regions' strong employment numbers can bolster their respective currencies, signalling economic resilience. However, rising inflation remains a key concern—if inflation accelerates in either the US or Eurozone, it could prompt central banks like the Federal Reserve or European Central Bank (ECB) to raise interest rates, leading to strengthened currencies as a result of tighter monetary policy.

Pro Tip: Set rate alerts for major economic data releases on your currency platform. These alerts allow you to act quickly when inflation or employment reports cause significant movements in the EUR/USD rate.

War in Ukraine (2022-2023):

The ongoing war in Ukraine has profoundly affected the euro, primarily due to the Eurozone’s dependence on energy imports from Russia. Disruptions in energy supply chains and surging prices have weakened the euro as European economies grapple with higher energy costs and inflation. In contrast, the US dollar has strengthened during this period, benefiting from its status as a safe haven, as global investors flock to the USD during geopolitical instability.

Pro Tip: Use forward contracts to lock in rates during geopolitical uncertainty. This strategy helps you avoid potential losses if the euro weakens further due to ongoing conflicts.

Oil Prices:

As one of the world’s largest oil producers, the US dollar is susceptible to changes in oil prices. When oil prices rise, the dollar strengthens, especially as the Eurozone struggles with higher energy costs. Conversely, falling oil prices can weaken the USD, particularly if they ease inflationary pressures in the Eurozone and relieve energy-reliant industries. A more stable energy market in Europe often translates into a stronger euro against the dollar, as lower costs boost economic growth.

Pro Tip: Monitor oil price movements closely if you plan a large EUR/USD conversion. Favourable shifts in oil prices can create better opportunities to convert currency, mainly if lower oil prices help strengthen the euro.

Global Trade and the EUR/USD Exchange Rate:

Trade plays a huge role in how the EUR/USD exchange rate moves. When the Eurozone or the US exports more than it imports, it boosts demand for that region’s currency. For example, the euro strengthens if the Eurozone sells more goods to the US. But the opposite is true too—if the US has a trade surplus with Europe, the demand for dollars increases, and the euro weakens.

Throw in trade disputes, like the tariffs introduced during the Trump administration, and you get even more volatility in the exchange rate.

Pro Tip: Trade disputes or tariffs can disrupt the EUR/USD exchange rate. If you anticipate long-term trade tensions that could impact your conversions, consider using hedging strategies like forward contracts or options.

Seasonal Trends in EUR/USD:

Believe it or not, the EUR/USD exchange rate can shift with the seasons. Tourism plays a big part—when summer hits, travellers flock to Europe, increasing demand for the euro, which can push up its value. On the flip side, demand for the dollar tends to rise during the US holiday shopping season. Businesses' end-of-year fiscal rebalancing also contributes to exchange rate fluctuations as companies and governments settle their books.

Pro Tip: Time your conversions with seasonal trends to maximise value. Convert euros during the summer when tourism boosts demand, and convert dollars during the holiday season when the dollar typically strengthens.

Middle East Crisis:

The ongoing Middle East tensions have also contributed to currency volatility, with investors flocking to safe-haven currencies like the US dollar during heightened instability. Escalations in this region can increase oil prices, impacting both the euro and the dollar.

Pro Tip: Stay informed on developments in the Middle East, as they can create opportunities or risks for your currency conversions. Consider converting to dollars in times of rising tensions, as the USD typically strengthens during global crises.

Safe-Haven Currencies and Global Risk

When global uncertainty strikes, like during geopolitical tensions or financial crises, investors rush to safe-haven currencies—and the US dollar is usually at the top of that list. This "flight to safety" strengthens the USD while the euro, seen as riskier in comparison, tends to take a hit. Whether natural disasters or significant political events, the dollar often gets a boost as investors seek stability.

Pro Tip: In periods of high risk, consider converting currency in smaller amounts at different times rather than all at once. This strategy helps mitigate the impact of unpredictable currency movements during market instability.

Conclusion

The EUR to USD exchange rate is shaped by various factors, from central bank policies and global trade dynamics to geopolitical risks and seasonal trends. Understanding these influences can help businesses, investors, and travellers navigate the fluctuations and make informed decisions. Whether hedging against currency risk or planning an international investment, staying informed about the EUR/USD exchange rate will help you protect your finances and capitalise on favourable market conditions.

Stay Ahead in the Currency Game

Subscribe to 'Currency Pulse' now and never miss a beat in the currency markets!

Ready to act on today’s insights? Get a free quote or give us a call on: +44 (0)20 7740 0000 to connect with a dedicated portfolio manager for tailored support.

Important: This blog is for informational purposes only and should not be considered financial advice. Currency Solutions does not consider individual investment goals, financial circumstances, or specific requirements of readers. We do not endorse or recommend any particular financial strategies or products discussed. Currency Solutions provides this content as is, without any guarantees of completeness, accuracy, or timeliness.