In forex trading, there’s one currency pair that trumps the rest: EUR/USD, or the “euro” as it’s known among traders. The euro – which is the euro paired with the U.S. Dollar – is the most traded currency pair in the world. It has a larger trading volume than both the USD/JPY (U.S. dollar and Japanese yen) and GBP/USD (British pound and the dollar). Unsurprisingly, many currency traders focus the majority of their attention on the euro.
For the uninitiated, understanding how money is made in currency trading can be a challenge. The most basic idea is that traders profit off of the small fluctuations in the exchange rate that happen every day. So for example, a trader might buy euros when the exchange rate was 1 euro to 1.13 USD, and later sell and profit after an appreciation up to 1.15.
Yet, the euro is one of the more difficult currency pairs to gauge because there are so many factors that influence buy/sell prices. For example, U.S. and EU economic data, commodity prices, energy prices and global economic growth can all affect the rate. These factors in turn cause the exchange rate to fluctuate frequently, making it difficult to predict the movement of price.
With that in mind, there are a number of ways forex traders can approach euro trades. First, it’s important to keep a close eye on economic policy announcements, as surprise announcements can create volatility in the markets. And secondly, it’s best to do most of your trading during active market hours. Once you understand the factors that contribute to price fluctuations within the pair, though, you can begin to trade the pair more confidently.
When Is the Best Time to Trade the Euro?
The Foreign Exchange market is a 24/7 global marketplace. Traders around the world can buy and sell currencies at any time Monday through Friday. Yet, when trading in the euro, there is one time that’s best to approach the markets: The U.S./European Overlap. These are the hours when both the European and U.S. markets are operating concurrently, and it occurs from 1:00 p.m. to 5:00 p.m. GMT daily.
There are a number of reasons why the overlap is the best time to trade. For one, price actions – or the minute-to-minute fluctuations in value – are the most active, and as such, traders can gain more profits on short-term trades. Plus, because there are so many active traders during this time, liquidity for the currency pair is at its peak. That means there is a much greater chance that there are two willing participants on either side of a trade – someone who wants to buy and someone who wants to sell. This makes means you are much less likely to wait to find a trader on the opposite side of your deal.
What Economic Data Influences the Euro?
The markets respond to economic data, and that’s why traders must always be in tune with forecasts, announcements and news. For example, if the European Union announces a slowdown in growth, it’s likely the euro would decline in value, as foreign investors decide to the move their investments to more stable countries. So what are the most important announcements to watch?
Both central banks – the Federal Reserve in the U.S. and the European Central Bank in the Eurozone – meet regularly and set economic policy for their economies. What these banks do is often very important. For instance, the Federal Reserve increased interest rates in the U.S. in December. This type of policy announcement can encourage foreign investment, ultimately creating a greater demand for the dollar. In addition to central bank announcements, it’s important to also watch a country’s trade balances, commodity prices, and a country’s economic growth. These all can increase the value of a currency and affect exchange rates.
How Can You Predict EUR/USD Price Movement?
As the world’s most heavily traded currency pair, EUR/USD remains fairly predictable in its movements. One reason is that both the U.S. and European economies are very transparent, making surprise policy announcements less of a risk. Additionally, prices tend to follow traditional support and resistance levels. This means that the price may climb to a resistance level – which is the top of a trend – before falling toward a support level.
Using technical analysis, traders can come to a close estimation of daily support and resistance levels, and that’s another reason why this is such a popular currency pair to trade. The one exception is around economic announcements. EUR/USD experiences its highest levels of volatility whenever the Fed or European Central Bank is set to release data or announce new policy.
Article contributed by Learn to Trade
The euro is the world’s most popular forex currency pair, and if you’re interested in currency trading, it’s important that you learn how it works. Even if the pair won’t be a primary focus, its value correlates to other pairs. Fortunately, because of its popularity, it’s one of the most widely discussed, making it easier for novice traders to master it. If you want to learn more about Forex currency pair, click here.