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A Guide to Trading EURUSD

TABLE OF CONTENTS

A Guide to Trading EURUSD

A Guide to Trading EURUSD

Vantage Updated Updated Tue, 2024 January 16 07:34

What is EUR/USD Trading? 

EUR/USD is the currency pair which matches the exchange rate of euro (EUR) against the US dollar (USD). Traders can trade EUR/USD using financial derivatives like contract-for-differences (CFDs). They can also buy or sell the physical currency. 

In terms of trading, the euro is the base currency and the US dollar is the quote currency. This means the EUR/USD price refers to the amount of dollars that one euro can buy at any time. For example, if the market price is currently 1.10, it takes $1.10 to buy €1. 

Regarding the forex market:

  • The US dollar is the world’s most dominant currency, according to the BIS Triennial Central Bank Survey [1]. USD was on one side of 88% of all forex trades in April 2022 [2].  
  • The euro continued to be the world’s second most traded currency, on one side of 30.5% of all trades in April 2022 [3]. This is down slightly from 32% in the previous BIS Survey produced in 2019. 
  • As a result, trading in EUR/USD accounts for 22.7% of the total forex market turnover according to the April 2022 BIS Survey [4].  As a guide, the next most traded pair is USD/JPY which has 13.5% of the total volume [5].

EURUSD History

Before the birth of the eurozone and its own currency, there were several attempts to initially create a joint European economy. The European Economic Community (EEC) was established in 1957 to create the free movement of people, goods, and services across the borders of six countries [6]. This economic integration led to the formation of the European Community (EC) in 1993 which was eventually the forerunner to the EU. 

Meanwhile, policymakers founded the European Monetary System (EMS) in 1979. This was an adjustable exchange rate mechanism which promoted monetary policy stability throughout the continent by reducing major exchange rate fluctuations between competing European Community members [7]. The Maastricht treaty in 1992 took over from this arrangement with plans to set up one single currency. This remained in place until 1999 when it was replaced by the European Economic and Monetary Union (EMU). 

EMU ultimately led to the creation of the euro which was introduced on 1 January 1999. This seminal date saw national currencies like the French Franc and German Deutschmark, which had competed against the US Dollar individually, disappear as the euro launched in digital form. But the trading of EUR/USD didn’t kick off until 2002 when the first twelve European Union countries officially adopted the euro and the legacy, national currencies were folded into the new, physical single currency [8].

Why Trade EUR/USD Currency Pair?

EUR/USD accounts for nearly one in four forex transactions. This means it has the largest global trading volume and is the most popular currency pair in the world [9]. Four reasons to trade EUR/USD are:

  • Global macro gauge – By combining the first and third biggest economies, EUR/USD is a great measure of the overall health of the global economy. Prices constantly reflect the latest economic data, central bank policies and numerous other fundamental and technical factors. 
  • Liquidity – The major currency pair is the most traded currency pair which means there is high liquidity in the market. This enables traders to easily enter and exit their EUR/USD positions. 
  • Low spreads – Along with being the most liquid currency pair, it comes with consistently ultra-low spreads, even in times of high volatility. Banks, funds, traders, commercial users, and speculators are constantly buying and selling EUR/USD.
  • Trading hours – Foreign exchange markets are open 24 hours a day with three continuous, overlapping trading sessions in Asia, Europe, and the U.S. While liquidity may be less at the start of the day, volumes are generally high enough to give traders flexibility in trading EUR/USD. 

Historical Trends of EUR/USD Market 

Even though the idea of a single European currency has been around for decades, EUR/USD is a relatively new currency pair to trade, when you consider its history as compared to GBP/USD.  But after the euro’s inception into physical tender in 2002, EUR/USD quickly gained status as the foremost currency pair in terms of volume, liquidity, and spreads. 

By pairing the currency of two global economies, the EUR/USD has inevitably been impacted by all major financial events throughout its relatively short history. Over the last 15 years, there have arguably been three standout moments in history:

2008 [10]

Just around the beginning of the Great Financial Crisis, the dollar sank to an all-time low against the euro in July. The 15-nation euro, at the time, rose as high as 1.6038. Concerns about the health of the U.S banking sector and economy deepened amid the crumbling housing market. However, the crisis ultimately hit the global economy and the euro which went into a deep recession. 

2010

The European Debt Crisis started with Greece and Ireland having to be bailed out and saddled with severe austerity measures due to high government debt and institutional failures. EUR/USD went on a rollercoaster ride for the next two years, tumbling to a low in June 2010 at 1.1875 [11]

The pair then rallied less than a year later as a permanent bailout fund was set up. Low growth and high unemployment were key characteristics of the euro in the middle of the “twenty-tens”. 

2022

EUR/USD hit its lowest level in over 20 years as the Ukraine conflict caused an energy crisis and record-high inflation in the eurozone . Parity was breached for the first time since June 2002 as the currency pair fell 12 out of 14 months to 0.9535 [12]

But outright fear and gloom about winter blackouts and worse reversed as surging gas prices eased. This saw EUR/USD rebound sharply back towards 1.05 and the midway point of that previous 2021-2022 decline [13]

EUR/USD Prediction

Forecasting the EUR/USD exchange rate is a complex endeavour that requires careful consideration of economic indicators, policy decisions from central banks, and global market dynamics. Analysts draw on historical trends and current fiscal data to inform their projections, understanding that the interplay between the Eurozone and the United States’ economic health is pivotal. 

With the European Central Bank and the Federal Reserve steering monetary policies, each interest rate announcement or fiscal adjustment can send ripples through the currency markets.

The post-pandemic recovery path and geopolitical developments also play a role in shaping the currency pair’s trajectory. It’s important to recognise that while predictions are based on thorough analysis, the currency market is still subject to unpredictable market events that can alter the forecasted results.

What Moves the EUR/USD exchange rate?

Being a mix of two major global economies means EUR/USD is driven by a multitude of different factors. Five of the most important include:

The U.S Federal Reserve

The foremost central bank in the world dictates price action for all major financial markets and especially EUR/USD. It meets eight times a year to decide monetary policies like raising interest rates. Markets will also watch out for speeches by the Fed Chairperson and numerous other officials between meetings. 

The European Central Bank

The ECB also currently meets eight times per year, approximately every six weeks to discuss and set monetary policy. Like the Fed, the ECB issues a prepared statement ahead of a press conference chaired by the President of the ECB Governing Council. 

U.S Non-Farm Payrolls Report

This marquee risk event usually takes place on the first Friday of every month. The report includes a headline number of job gains or losses, the unemployment rate, and annual and monthly wage growth figures. The data is a key gauge of how the world’s biggest economy is faring. 

Other Economic Indicators

There are several other important data points that can have a big impact on EUR/USD. These include inflation figures and activity reports like retail sales and business surveys. 

Geopolitical Events

Relations between countries, for example U.S and China tensions, can have a major effect on the world’s most traded currency pair. Wars, economic hostilities, and market uncertainty from time to time propels US dollar for being the premier global reserve currency. 

EUR/USD Correlations

The correlation between the EUR/USD pair and various financial products are significant for traders, as they can influence strategies and risk management. Understanding these correlations can help in predicting the pair’s movements based on the performance of correlated assets, which can range from commodities to stocks and bonds, as well as other currencies.

Positive Correlations

1. Gold

Gold often exhibits a positive correlation with the EUR/USD pair due to the euro’s part in the pairing and its role against the dollar in global gold pricing. When the euro strengthens against the dollar, gold prices in USD tend to rise, reflecting a potential uptick in EUR/USD rates as investors seek a hedge against USD inflation and currency depreciation.

2. Euro Stoxx 50 index

European equities, particularly the Euro Stoxx 50 index, typically share a positive correlation with EUR/USD. As European equities rise, indicating economic optimism in the Eurozone, the euro often appreciates against the dollar. Consequently, an uptrend in this index could suggest a concurrent strengthening of the EUR/USD currency pair.

3. European government bonds

The European government bonds, especially German bunds, tend to move in tandem with EUR/USD. A declining yield environment in the Eurozone often results in a stronger euro as it can reflect accommodative monetary policies, which tend to be supportive of the EUR/USD price movements over time.

Negative Correlations

1. US Treasury yields

US Treasury yields typically have an inverse relationship with the EUR/USD pair. As yields on Treasuries rise, indicating a stronger demand for USD-denominated assets, the EUR/USD often declines as a result of the stronger dollar outperforming the euro.

2. USD/CHF

The USD/CHF (U.S. Dollar/Swiss Franc) currency pair often exhibits a negative correlation with EUR/USD. When the USD/CHF pair climbs, signifying a strengthening dollar against the Swiss franc, the EUR/USD tends to decrease due to the simultaneous dollar strength affecting the euro detrimentally.

3. Commodities (USD priced)

Commodities priced in USD, such as crude oil, can have a negative correlation with EUR/USD. When the prices of such commodities increase, it can bolster the USD as a commodity currency, often leading to a depreciation in the EUR/USD exchange rate due to the increased demand for dollars to purchase these commodities globally.

How to Trade EUR/USD

There are many trading ways to choose from when buying and selling EUR/USD. Often the most feasible ones will depend on your trading style and personality, and are drawn from either fundamental or technical analysis, or a combination of the two.

Fundamental Analysis

In simple terms, fundamentals focus on “the why” so why is EUR/USD moving in terms of economic, political and sentiment factors. This type of analysis often requires some knowledge of markets to form sustainable trading views.

Technical Analysis 

This is interested in the “what” which relates to the study of prices and trends on charts. Price action is analysed to determine current and future trading conditions in EUR/USD. Identifying recognisable patterns helps traders find entry and exit points in the live market.

This approach often employs a variety of technical indicators, such as moving averages, Relative Strength Index (RSI), Bollinger Bands, Moving Average Convergence/Divergence (MACD) indicator and Fibonacci retracement levels each providing unique insights into volatility, momentum, and potential support and resistance levels.

Risk Management

Risk Management is another important component of trading EUR/USD, as it is with any currency pair. It involves setting predefined limits on the amount of fund to trade and setting stop-loss orders to protect your funds from significant losses. 

By employing prudent risk management techniques, such as proper position sizing and using leverage wisely, traders can aim to make consistent gains while reducing the potential for losses. Whether you prefer a fundamental or technical analysis approach, or a blend of both, incorporating vital risk management is essential in navigating the complexities of trading EUR/USD effectively.

EUR/USD Trading Strategies

Before going into individual strategy, let’s talk about going short and long on EUR/USD:

What it means to short EUR/USD

Shorting EUR/USD involves taking a position that will make a return from a decline in the value of the euro relative to the US dollar. When a trader short EUR/USD, they intend to sell euros with the intention of repurchasing them at a lower price in the future. This is done in anticipation of a downward movement in the exchange rate. If the exchange rate does indeed fall, the trader can buy back the euros at a cheaper rate, thus making returns on the difference.

What it means to long EUR/USD

To long EUR/USD means that a trader is buying euros and selling US dollars, expecting that the euro will increase in value against the dollar. When a trader enters a long position, they do so with the view that the EUR/USD exchange rate will rise. For instance, if the exchange rate moves higher after the initial purchase of euros, the trader can now sell them at a higher price, securing a profit from the trade. 

Specific Trading Strategies for EUR/USD

  • Day Trading
    This short-term strategy means traders don’t hold any position overnight – they enter and exit all orders within the trading day. This normally means traders hold a large number of positions for small profits. 
  • Position Trading
    Position trading is a longer-term trading strategy, usually involving fundamental analysis to forecast EUR/USD trade ideas. Short-term market fluctuations are less important, and traders will probably have only a small number of trades open, but with a higher value.
  • Swing Trading
    This strategy involves technical analysis to take advantage of short to medium-term EUR/USD market movements. Like both day and position trading, traders look to identify intermediate trends in the market.
  • Sentiment Trading
    Sentiment trading in the EUR/USD pair involves analysing the overall feeling or tone of the market. Traders use various indicators and surveys, like the Commitment of Traders (COT) report or consumer confidence indices, to gauge whether market participants are feeling bullish or bearish about the Euro or the US Dollar.
  • News Trading
    News trading is all about keeping updated with the market news and trends. This strategy requires traders to make trades based on how they think the EUR/USD pair will react to real-time news events. For example, if there’s a report that the economy in the Eurozone is doing better than expected, traders might buy Euros, expecting the price to go up.

Discover which trading strategy is best for you by gaining a better understanding of position trading vs. swing trading here.

Trade-EURUSD

Best Time to Trade EUR/USD

For traders interested in the EUR/USD currency pair, the optimal trading window is often when the London session overlaps with the New York session. This period is renowned for its heightened volatility and increased trading volume, presenting opportunities to capitalise on price fluctuations. It’s a time when market momentum can pick up swiftly as traders and financial institutions from both continents are active, making it an ideal time for those looking to take advantage of trends and swings in exchange rates.

However, the best time to trade the EUR/USD isn’t solely dependent on market hours; it also hinges on individual trading strategies. For example, long-term traders might find value in less volatile hours, where they can analyse the market without the noise of heavy trading. It’s also crucial for traders to consider economic releases and news events which can cause sudden volatility in the markets.

Final Thoughts

EUR/USD is the most popular currency pair in the world. Its liquidity and narrow spreads mean it is highly attractive to all types of traders. 

Both fundamental and technical analysis can be used to enter and exit positions. The pair is heavily influenced by global factors which often grab the news headlines. 

Using a defined trading strategy in EUR/USD allows you to be consistent, control your emotions and manage your risk. These elements are key to long-term success when trading EUR/USD. 

FAQs for EUR/USD Trading

1. What is the Spread on EUR/USD at Vantage?

The spread on EUR/USD at Vantage is highly competitive, starting from 0.0 pips. This narrow spread is particularly advantageous for traders looking to minimise transaction costs on one of the most liquid and widely traded currency pairs in the forex market. The actual spread can vary, depending on the market conditions and liquidity available at the time of trading.

2. What are the risks of trading EUR/USD?

The risks of trading EUR/USD like any currency pairs comes with several risks. Firstly, the exchange rates can fluctuate widely due to economic reports, political events, central banks decisions and over market sentiment. Leverage can magnify both potential profits and losses, which leads to substantial financial losses if not managed properly.

3. Is EUR/USD a Good Pair to Trade?

Whether EUR/USD is a good pair to trade really comes down to what you’re looking to achieve in the forex market. 

This currency pair is one of the most traded pairs in the world, which means it is often more liquid, allowing traders to enter and exit trades without much price slippage. Additionally, due to its popularity, it’s also well-covered by financial news, so traders often stay informed about factors that might affect its price. 

However, this popularity also comes with its own risks, as this pair can be sensitive to economic news and global events, which can cause price swings.

4. What are the Additional Tips for Trading EUR/USD?

When it comes to trading EUR/USD, keeping yourself updated of the economic news and events such as interest rate decision, employment reports and political developments from both the Eurozone and the United States is crucial. Additionally, monitoring technical indicators and chart patterns can help in making informed decisions, while also considering market sentiment and trader positioning which can signal potential trend directions.

References

  1. “OTC foreign exchange turnover in April 2022 – BIS”. https://www.bis.org/statistics/rpfx22_fx.pdf . Accessed 25 April 2023.
  2. “Is Forex Trading Hard? – Yahoo! Finance”. https://finance.yahoo.com/news/forex-trading-hard-110000501.html . Accessed 25 April 2023.
  3. “CAN CHINA KILL THE US DOLLAR? – BBN Times”. https://www.bbntimes.com/global-economy/can-china-kill-the-us-dollar . Accessed 25 April 2023.
  4. “OTC foreign exchange turnover in April 2022 – BIS”. https://www.bis.org/statistics/rpfx22_fx.pdf . Accessed 25 April 2023.
  5. “OTC foreign exchange turnover in April 2022 – BIS”. https://www.bis.org/statistics/rpfx22_fx.pdf . Accessed 25 April 2023.
  6. “European Community – Britannica”. https://www.britannica.com/topic/European-Community-European-economic-association . Accessed 25 April 2023.
  7. “What Is the European Monetary System (EMS)? Definition, History – Investopedia”. https://www.investopedia.com/terms/e/ems.asp . Accessed 25 April 2023.
  8. “Currency Pair: EUR/USD (Euro/U.S. Dollar) Definition and History – Investopedia”. https://www.investopedia.com/terms/forex/e/eur-usd-euro-us-dollar-currency-pair.asp . Accessed 5 May 2023.
  9. “Major Pairs: Definition in Forex Trading and How to Trade – Investopedia”. https://www.investopedia.com/terms/forex/m/majors.asp . Accessed 5 May 2023.
  10. “Dollar hits new low versus euro – CNN Money”. https://money.cnn.com/2008/07/15/markets/dollar/index.htm . Accessed 5 May 2023.
  11. “EUR/USD Technical Analysis: 2010 Low in the Spotlight – Yahoo! News”. https://news.yahoo.com/eur-usd-technical-analysis-2010-052900710.html . Accessed 5 May 2023.
  12. “EURUSD analysis and price prediction for today, 2023 and beyond: Further gains or back to parity? – Capex.com”. https://capex.com/en/overview/eurusd-price-prediction . Accessed 5 May 2023.
  13. “The euro is nearing parity with the dollar: Here’s what it could mean for investors – CNBC”. https://www.cnbc.com/2022/05/19/euro-dollar-what-does-it-mean-for-investors-as-the-pair-nears-parity.html . Accessed 5 May 2023.
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