A Guide to Trading EURUSD

What is EURUSD?  

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). CFD allows trader to speculate on the price movement of an asset without actually owning it. Traders 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 EURUSD? 

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.  

Analysing EURUSD Market Trends 

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].  

Factors that Affect EURUSD Value

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: 

1. 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.  
2. 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.  
3. 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.  
4. 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.  
5. 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 the US dollar for being the premier global reserve currency.  

EUR/USD Analysis

There are many methods of analysis to conduct before 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.  

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. 

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.

References