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Key factors for trading EUR/USD
2019-11-11 • Updated
Information is not investment advice
To understand what factors affect the EUR/USD, let’s start with a description of the currency pair.
EUR/USD also has two other nicknames such as the Euro and Fiber. The name Euro is quite simple when there are two opinions why the name Fiber appeared. Someone supposes the currency got it because of the GBP/USD pair that is called Cable. It is like traders made an upgrade of the old telecommunications cable that was used to connect the UK and the US to a newer fiber cable. Others decided that the Fiber name appeared because the Eurozone has the best optical fiber network in the world.
The Fiber belongs to the group of “Majors”, that also includes another six pairs such as GBP/USD, USD/JPY, AUD/USD, USD/CHF, NZD/USD and USD/CAD.
The power of the pair is incredible. The US dollar is the most traded and widely held currency, the euro is the second most popular currency in the world. The EUR/USD covers two main economies: European and American, so it has more than half of the total trading volume in the world on the Forex market.
So let’s move to the key factors.
The first factor is sessions. Traders should know when the pair can have the highest volatility and when it is nearly not traded. Usually, the pair is slightly traded during an Asian session because the most important economic data and events for EUR/USD are released in European or US sessions. The activity slows down at noon when traders have lunch and rises again later as the US session starts. Liquidity leaves the market again at 5:00 GMT when traders in Europe close out their positions.
Institutions and personalities
The most important institutions that affect the pair are central banks of Europe and the US. The European Central Bank under the guidance of Mario Draghi and the Federal Reserve Bank with Jerome Powell as its chair regulate the monetary policy, money supply, interest rates, and the strength or weakness of the currency as a result.
The market follows every meeting of central banks and speeches that the president and the chairman give. It creates volatility at the Forex market.
Any political issue can affect the EUR/USD pair. For example, Brexit, crises in European countries, elections in countries with the biggest economies in the European Union.
We can mention claims of politicians as well. For example, the US Treasury Secretary Steven Mnuchin said that “a weaker dollar is good for the US”. This statement caused the immediate fall of the USD.
Every week the economic calendar offers a huge amount of data. We will mention the most important, that every trader should take into account.
We have already mentioned central banks of the EU and the US and their monetary policy.
The next significant factor is CPI – Consumer Price Index – that measures inflation, the most important indicator of the economic health.
Another crucial data is GDP. It shows how much the economy is strong and healthy.
PMI is another way to estimate the economic health that affects the strength of a currency. The survey shows whether purchasing managers are optimistic or pessimistic about the economy in the medium-term. This survey is highly important because central banks use data when formulating monetary policy.
Balance of payment is not the last in the list of important economic reports. It shows how much money a country receives from abroad and how much it pays to other economies.
There are a lot of other economic reports, however, these ones are the most important and should be taken into the consideration firstly.
According to economic theories, there is a correlation between interest rates and exchange rates. It is called the International Fisher effect. And indeed in most cases, it is so. Usually, currencies rise and fall according to interest rates of economies. For example, when US interest rates are higher than the European Union ones, the US dollar strengthens versus the euro. Conversely, the higher Eurozone interest rates, make the dollar weaken.
To sum up, it is important to say that the EUR/USD pair is the main pair at the currency market because it gathers two major economies. If traders want to trade it successfully, they should take into account a lot of factors such as sessions during that the pair is traded more, institutions and personalities whose comments and decisions create volatility, political instability, and of course, economic reports that display growth and health of the economy.
Financial markets alternate between periods of decline and growth. They are related not only to the economy, but also to the psychology of investors.
Inflation doesn't come from nowhere. There’s always a reason for it to occur. Moreover, it’s often happening because of human mistakes and biases.