How To Trade EUR/USD

What is EUR/USD 

EUR/USD is one of the most traded currency pairs in the world because it represents the two largest and most influential economies in the world: the European Union and the United States. The exchange rate between EUR and USD fluctuates constantly based on supply and demand, economic and political factors, interest rates, inflation and market sentiment.  

Introduction to Trading EUR/USD 

EUR/USD is the most heavily traded currency pair in the foreign exchange market, which is hardly surprising given that the two currencies account for over 80% of the world’s official foreign exchange reserves. ‘Fibre’, as the pair is colloquially referred to in trading circles, is a favorite of FX traders due to its vast liquidity and its reflection of the economic outlook of both the Eurozone and US. 

However, the exchange rate itself is just over 20 years old, coming into existence in 1999 after the Euro was introduced as a replacement for the national currencies of all 27 members of the European Union – excluding Denmark and the United Kingdom. Throughout this article we will dive into the history of EUR/USD, how to understand what the fundamental drivers of this influential exchange rate are, and the most appropriate technical strategies to use when looking to initiate long or short positions. 

The History of the EUR/USD Exchange Rate 

As mentioned above, the EUR/USD exchange rate was introduced just before the turn of the millennium in 1999. Yet, the Euro was established as a currency in 1992 under the provisions of the Maastricht Treaty. The treaty itself listed a series of strict criteria that member states must meet to garner access to the currency, such as: 

• Budget deficit less than 3% of GDP 
• Overall debt ratio less than 60% of GDP 
• Low levels of inflation 
• Interest rates similar to the average EU rate 

The historical context provides valuable insights for Australia due to its interconnected trade relationships and participation in the global economy. In an increasingly interconnected world, understanding the formation of the Euro currency and the major historical events that have impacted the EUR/USD exchange rate is crucial.  

For instance, events like the 2008 global financial crisis, the Greek debt crisis and Brexit have had far-reaching consequences, affecting not only European markets but also influencing global economic dynamics, which in turn can impact Australia’s trade relationships and markets. 

Comparing the EUR/USD exchange rate to the Australian Dollar (AUD) is also pertinent. Analysing how these two major currency pairs interact can provide valuable insights into the dynamics of international trade and investment.  

Furthermore, from a trading perspective, it’s essential to recognise that movements in the EUR/USD exchange rate can have ripple effects on Australian markets, influencing everything from export competitiveness to the overall health of the Australian economy. Thus, understanding the history and dynamics of EUR/USD is not only relevant to Europe but also to Australia’s economic and financial landscape.  

The Euro is the official currency of the European Union (EU), which consists of 27 member states located throughout Europe. Of those 27 members, 19 utilize the Euro as their sole currency. Finally, the currency is managed by the European Central Bank (ECB), an independent entity that implements various monetary policy regimes to achieve its respective growth and inflation targets. 

What Impacts EUR/USD 

The EUR/USD rate reflects the relative strength and weakness of the two economies, as well as their monetary policies, trade balances, and geopolitical events. There are many factors that can impact the EUR/USD rate, but some of the most important ones include: 

• Central Bank Decision  

The European Central Bank (ECB) and the US Federal Reserve (Fed) are the central banks of the Eurozone and the US, respectively. They are responsible for setting the interest rates and conducting the monetary policy for their regions.  

The interest rates affect the demand and supply of the currencies, as well as the inflation and growth prospects. A higher interest rate makes a currency makes attractive for investors, as it offers a higher return on their deposits or investments. Conversely, a lower interest rate can make a currency less appealing, potentially leading to a decrease in its value. 

• Economic Indicators 

Economic indicators are statistics that measure the performance and health of an economy, such as GDP, unemployment, inflation, consumer confidence, industrial production, retail sales, etc. These indicators reflect the current and future state of an economy, as well as its potential for growth or contraction.  

Therefore, if the Eurozone releases positive or better-than-expected economic indicators, this could boost the EUR and drive up the EUR/USD rate. Conversely, if the US releases positive indicators, this could boost the USD and drive down the EUR/USD rate.  

• Geopolitical Events 

Geopolitical events are events that involve political, social, or military conflicts or tensions between countries or regions, such as wars, elections, referendums, protests, etc. These events can affect the stability and security of an economy, as well as its trade and diplomatic relations with other countries or regions.  

• Trade Balances and Relations  

Trade balances and relations are measures of how much an economy exports and imports goods and services from other countries or regions, as well as how friendly or hostile it is with its trading partners.  

• Speculations and Market Sentiments 

Speculations and market sentiments are expectations and emotions of market participants regarding the future movements of currencies or other assets. Speculators are traders who buy or sell currencies based on their predictions of future price changes. Market sentiments are indicators of how optimistic or pessimistic market participants are about an economy or a currency. 

How to Trade EUR/USD Using Fundamental Analysis 

The EUR/USD exchange rate is a direct reflection of the health of two of the world’s largest economies, the United States and European Union. Therefore, in order to trade the FX pair effectively, it is important to stay on top of the health of both economies and the actions of the Federal Reserve and European Central Bank. 

Keep up to date with Vantage’s Economic Calendar to track important market-moving economic news and Sentiment Indicators.  

European Central Bank Policy Settings 

The major driver of the exchange rate over the last few years has been the accommodative stance of the European Central Bank in particular, as the Eurozone continues to fight deflationary forces. This has forced the ECB to rapidly expand their balance sheet through the implementation of various asset purchasing programs, such as its Targeted Longer-term Refinancing Operations (TLTRO) and Pandemic Emergency Purchasing Program (PEPP). Ultimately, these operations introduce excess liquidity into the system, increasing supply of Euro’s and weighing on the currency against its US counterpart. 

Chart prepared by Daniel Moss, created with Tradingview 

Federal Reserve Policy Settings 

Of course, the ECB is not alone in its ultra-accommodative approach to monetary policy. In fact, the Federal Reserve’s balance sheet has exploded higher in the aftermath of the Global Financial Crisis in 2008. The introduction of Quantitative Easing by the Fed initially allowed the Euro to appreciate against the US Dollar. However, the European Debt Crisis between 2010 and 2012 erased these gains rather rapidly as the ECB aggressively lowered its benchmark interest rate and provided more than a trillion euros in loan to calm financial markets. 

Chart prepared by Daniel Moss, created with Tradingview 

Economic Data Points 

Economic data also has a strong influence on EUR/USD, with GDP, Consumer Price Index (CPI), employment and Purchasing Managers Index (PMI) releases all potentially influencing the monetary policy response of both the Fed and ECB. Better-than-expected data could open the door for either central bank to tighten policy measures, leading to an appreciation of their respective currencies. 

Trading Event Risk 

Event risk is a significant factor in the financial markets, capable of instigating unexpected movements that catch even the most seasoned investors off guard. This phenomenon is fueled by factors ranging from headline news to unforeseen occurrences. 

News headlines:  

The financial world is inundated with an ever-flowing stream of headlines, some of which carry immense weight in the market’s eyes, while others might appear less credible but trigger a flurry of activity. These headlines can originate from a multitude of sources, including central banker or politician comments, surprising economic developments – both positive and negative, or even groundbreaking inventions that have the potential to revolutionise industries. In the fast-paced world of trading, the initial reaction is often to hit the buy or sell button without fully comprehending the implications. It’s crucial to mention that these headlines can create significant volatility and, in some cases, spark trends that persist over longer periods.  

Natural disasters: 

Natural disasters, unlike other forms of event risk, are impossible to predict or prepare for. However, in today’s hyperconnected world, news of these catastrophic events spreads like wildfire across social media platforms, regardless of where they occur. The rapid dissemination of information amplifies their influence on financial markets. The immediate and long-term economic impacts of such events often necessitate quick decisions and risk management strategies.   

Geopolitical events: 

Geopolitical events, such as terrorist attacks, declarations of war, and political tensions, have the power to send shockwaves through forex markets. These events introduce an element of uncertainty and risk that can disrupt established trading patterns. Changes in government policies, international conflicts, and diplomatic relations can significantly impact currency values. 

How to Trade EUR/USD using Technical Analysis 

EUR/USD is one of the favourite pairs for many FX traders to trade, given its high volume of market participation and vast amounts of liquidity. It tends to accelerate aggressively after breaching key horizontal support and resistance levels, as well as various uptrends and downtrends. 

A prime example of this is the uptrend break in July of 2014 which resulted in a 22% decline for EUR/USD in a little under 9 months. A similar decline also occurred in 2018, albeit not of the same magnitude as that experienced in the tail end of 2014. 

Using various momentum-based indicators, such as The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), can be used to filter buy and sell signals. The RSI’s inability to climb back above its neutral midpoint of 50 in July of 2014 would’ve provided a trader with a confirmatory signal to initiate a short position on the exchange rate. Here are some of the key concepts for technical analysis: 

Candlestick Patterns  

Candlestick patterns are visual representations of price movements within a specific timeframe, typically depicted as a candle-shaped figure on a price chart. These patterns offer valuable insights into market sentiment and the possibility of reversals. Some of the frequently employed candlestick patterns encompass Doji, Hammer and Inverted Hammer, Engulfing and Head and Shoulders.  

Support and Resistance  

Support and resistance represent fundamental concepts in price action trading. Practitioners of price action trading utilise these principles to pinpoint potential entry and exit positions, establish risk-reward ratios and place stop-loss orders. 

Trend Analysis 

Price action traders examine patterns such as higher highs and higher lows for an uptrend and lower highs and lower lows for a downtrend to determine the overall trend. This aids in determining the trajectory of their trades.  

Price Patterns 

Traders also look for chart patterns such as head and shoulders, double tops and triangles. These patters can provide information about potential price movements. 

Chart prepared by Daniel Moss, created with Tradingview 

Strategies to Trade EUR/USD 

Trading EUR/USD currency pair requires different approaches depending on your trading preferences, willingness to take risks and the current market conditions. It is essential to know when to apply the right strategy to capitalise on the price movements of this currency pair.  

Here are the top popular forex trading strategies you can use when executing trades on EUR/USD. 

Swing Trading  

Swing trading attempts to capture short-to-medium term gains over a period of a few days to several weeks. Swing traders primarily use technical analysis to look for trading opportunities, but they may also use fundamental analysis to enhance their analysis.   

Day Trading  

Day trading is a form of trading that occurs within the same day. Day traders aim to profit from the small price movements that occur during the trading session, and they usually close all their positions before the end of the day to avoid overnights risks and fees.  

Position Trading  

Position trading involves holding a position in a security for a long period of time, usually months or years. Position traders rely on fundamental analysis and long-term trends to identify and profit from market movements. Position trading can be similar to buy and hold investing, but position traders can also take short positions, unlike buy and hold investors who can only go long.  

Trend Trading  

Trend trading is style of trading that tries to capture gains by analysing the momentum of an asset’s price in a certain direction. When the price is moving mostly up or down, that is called a trend. Trend traders enter a long position when the price is trending up, and a short position when the price is trending down. Trend traders use various tools and techniques to identify and follow the trend, such as moving averages, trendlines, chart patterns and indicators.  

Retracement Trading 

Retracement trading involves entering a position in the direction of the main trend after a temporary pullback or correction. This style is based on the assumption that trends tend to move in waves, and that price movements are not linear or smooth. Hence, traders use techniques such as Fibonacci levels, trendlines, moving averages and indicators to identify and measure retracements.  

Trade EUR/USD with Vantage 

You can open your live trading account in less than five minutes with Vantage to start trading EUR/USD. Vantage also provides a free demo account, which will allow you to practice various trading strategies and techniques without having to deploy your own capital. Follow the links to find out how you can get started!