The forex market involves trading one currency against another currency that is often done through the Best Trading Platforms in this trading universe. Certain currency pairs are more popular compared to other pairs for various reasons. In recent times, the most commonly traded currency pair is the EUR/USD, the Eurozone Euro, and the U.S. dollar.
Among the obvious reasons for the importance of the EUR/USD pair is that these are currencies of two of the world’s most important economies. The U.S. dollar is the official currency of the world’s leading economy, the United States, and the Euro is the official currency of the Eurozone members including powerhouse nations like Germany and France.
Since the end of World War II, the U.S. dollar has been the world’s dominant currency. When nations dropped the gold standard, the USD became the nation’s reserve currency as countries purchase oil on the international market with U.S. dollars.
Most nations in the world, for this reason, try to have a stockpile of U.S. dollars in order to ensure that they can access the oil markets. Investors also historically view the USD as the most stable of international currencies. During times of turmoil in the forex markets, investors traditionally seek sanctuary in the U.S. dollar. In many cases, the United States benefits economically from the strength of its currency.
For example, international investors may prefer the United States as a destination for their money because they have fewer fears of the USD becoming unstable. In this way, they have less risk of losing any gains they may make investing in the U.S. stock market or in U.S. real estate, for example.
The Euro has a significantly shorter history than the U.S. dollar as it only came into being after the formation of the European Union (EU). However, not all EU nations use the Euro as their official currency. Only the Eurozone members along with a few other nations use the Euro.
Additionally, Monaco, San Marino, Vatican City, and Andorra have formal arrangements with the European Union to use the Euro as their official currency. Kosovo and Montenegro unilaterally adopted the Euro. These non-Eurozone nations do not have any representation in the bodies that formulate Euro policy.
Because of the importance of both the Euro and the U.S. dollar in the world economy, it is important that traders understand these currencies. Knowledge of how these currencies interact can help the investor in understanding the international currency market in general.
History of the EUR/USD pair
The Euro only came into the market formally in 2001, so it definitely is a newbie when compared to the U.S. dollar. Initially, the Euro made a strong impression and became highly valued when compared to other world currencies including the USD. Not everyone, though, was quite as confident about the prospects of the Euro despite its energetic beginnings.
In those early days, trading between the USD and the Euro was highly stable. Sharp fluctuation in value between the two currencies was uncommon. There remained, however, a cadre of skeptics that believed the young European Central Bank was at a disadvantage against older players like the U.S. Federal Reserve. A number of experienced investors believed that the Euro would eventually plunge due to uncertainty in the market.
Indeed, the naysayers’ predictions came partially true after the economic collapse known as the “Great Recession.” Many Eurozone nations including Greece, Spain, Portugal, Ireland, and Italy found themselves in serious financial trouble during this worldwide downturn. The national governments had little recourse but to slash spending in the face of mounting deficits.
Because of the turbulence in the Eurozone, the Euro began to flounder like never before. The previous stable relationship with the U.S. dollar became outdated, at least temporarily. Member nations have been rallying behind the Euro noting that the future of the European Union depended on having a stable single currency. The effort has helped the Euro regain some of its former statures.
Trading the Euro
One of the reasons that many investors like trading the EUR/USD are that the pair often moves in strong trends without excessively volatile action. Most traders dislike sharp movements that increase the risks of losses. Instead, they prefer currency pairs that have a history of the strong but steady movement with lower risk.
Because the currency pair tends to move a predictable way strongly over the course of a trading day, it is one of the most popular choices for conservative and moderate risk investors. Trends are typically noticeable even in short periods of hours or less. Technical traders, in particular, like the pair because it shows trends that display well on technical charts for short-term trading.
Some of the important fundamental factors when trading the EUR/USD pair are:
- GDP statistics
- Employment statistics
- Consumer Price Index (CPI)
- Producer Price Index (PPI)
- Retail Sales Figures (RSI)
- Central Bank policy
- German Industrial Production
- Index of Consumer Prices
- IFO Survey
Probably the single most important factor in determining the future direction of the EUR/USD pair is the interest rate policy of the central banks. If either the U.S. Federal Reserve or the European Central Bank wants to strengthen their currency, they will raise the interest rate. The central banks can also influence the trends between the two currencies when they decide to increase or decrease the printing of new money.
Generally, the law of supply and demand will force the value of a currency downward if there is excess supply and upward when there is excess demand. Therefore, if the central bank prints too much money, it can send the value compared to other currencies downward.
The United States and the Eurozone nations constitute some of the most important economies in the world. For this reason, the employment data released by these two can have a great impact on the forex markets. The United States employment figures can have an immediate influence on many financial markets, and investors from all over the world await the monthly official reports from Washington.
In the Eurozone, Germany and France are among the world’s major economies. Investors also closely watch