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How To Trade EUR/USD?

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 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.

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.

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.

European Central Bank Policy Settings

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.

Federal Reserve Policy Settings

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.

How to Trade EUR/USD using Technical Analysis

EUR/USD is one of the favorite 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.

How to Trade EUR/USD using Technical Analysi

Chart prepared by Daniel Moss, created with Tradingview

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!

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