Taking a Fundamental Approach to Forex Trading

Trading the Euro with the ESI

Released monthly by the Directorate General for Economic and Financial Affairs of the European Commission, the economic sentimental indictor (ESI) is a broad index that measures the overall activity of the European economy. ESI is a powerful analytical tool as it produces three separate economic numbers that cover the different geographic, economic, and political entities within the European Cotenant (one foe every member state of the EU, one for EU, and one for the Euro Zone).

Conducting the surveys:
*Each 3 to 4 years, the European Commission chooses different economic institutes across Europe to participate in conducting the surveys
*These institutes send the questionnaires to both businesses and consumers in every European country.

Response Formula:

Value of 1 = negative response

Value of 5 = unchanged response

Value of 9 = positive response

*By using the above formula, answers are transformed into balances (the difference between the percentage that gives [positive response and the percentage that gives negative response).

Economic Inputs of the ESI:
ESI is a composite index representing 5 different sectors of the economy. Each of them has a specific weight in the index

Industrial sector 40%

Service sector 30%

Consumer sector 20%

Construction sector 5 %

Retail trade sector 5%

Interpreting the numbers:
"100" is the long term average of the ESI

•	. A reading below 100 refers to a slide in the economic performance of the Euro Zone and should encourage the selling of the European currency EXAMPLE: Through all of 2005, ESI remained well below 100; the EUR/USD declined respectively from 1.36 to 1.16 by the end of the year.
•	A reading above 100 refers to a strong economy and should boost up the European Currency. EXAMPLE: In 2006, ESI recovered and reached a high of 111; The EUR/USD rallied from 1.18 to 1.33 by the end of the year.