This article aims to list some of the major factors that affect the trading of two popular fiat currencies EUR/USD in exchanges. This pair has the highest trading volume when compared to the other pairs. Many of the brokers offer a low spread for this pair. Hence the pair is also very liquid. For traders, trading this pair offers good profitability with many favourable opportunities in a single trading day. The risk in trading with this pair is also seen to be low when compared to many other currency pairs. The first step is to describe the currency pair EUR/USD.
The EUR/USD currency pair is also referred to with nicknames such as Euro and Fiber in the exchanges. While the name Euro can be understood right away, there are two different stories as to why the pair took on the name of Fiber. The GBP/USD pair is also called the Cable. The Cable denoted the old telecommunications cable that connected the US to the UK. However, now it has been upgraded to the fibre cable and that may be the reason. There are others that claim the name Fiber came about because the Eurozone has purportedly the most advanced optical fibre network in the whole world.
Fiber is one among six other major currency pairs that include USD/JPY, USD/CHF, GBP/USD, USD/CAD, AUD/USD and NZD/USD.
Also Read: Major Currency Pairs EURUSD, USDJPY, GBPUSD Characteristics
The EUR/USD pair is a powerful currency pair because it is traded widely and held by most brokers and traders. All this is because of its popularity. The economies covered by these two currencies are important and hence the popularity. This pair accounts for more than half the trading volume in the forex markets of the world.
Let us now examine the most important factors:
#1: Trading Sessions
One important factor that affects the trading of the EUR/USD pair is the timing of the trading sessions. Traders ought to know when there will be high volatility and at what times the pair is not likely to be traded at all. The times when the trading is light is during the Asian sessions because all economic data and other important events are announced during the European and US sessions. The activity is low during the lunchtimes and once again peaks at the start of the US session. It is less liquid once again when the European traders shut shop at 5.00 GMT.
#2: Influence of the Institutions / Personalities
The central banks of both Europe and the US are important institutions that affect the trading of this pair. Mario Draghi, who heads the European Central Bank and Federal Reserve Bank headed by Jerome Powell (now) control different factors such as the monetary policy, supply of money, interest rates, etc., that eventually determines the strength or weakness of the currency. The market reacts to every meeting that these banks conduct and every speech the presidents of these banks give. This is one reason for the volatility of this currency pair.
#3: Political Events
Any political event that takes place has the capacity to affect the value of the EUR/USD pair. BREXIT caused a ruffle and any crisis that happens in European countries or elections in any one of the countries affects the volatility. Even statements made by politicians can swing the value of the currency.
#4: Economic Reports
The economic calendar contains a lot of important data on a weekly basis. The most important of these announcements affect the value of the forex pair EUR/USD. These announcements control the direction of the markets and should be constantly monitored by the traders. The Consumer Price Index, a measure of inflation, is one of the most important indicators of the economic health of a nation. GDP is yet another measure that reflects the strength of an economy. The PMI survey predicts whether purchase managers are in favour or are pessimistic about the economy during the medium term. Central banks use this data to formulate the fiscal policy. A balance of payments shows the amount of money that any country receives from abroad and how much money it pays to other outside economies. This is yet another important factor. Though many other factors are present in the economic reports, the most important ones are the ones that most affect the value of the trading pair.
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#5: Interest Rates
Economic theories point to the connection between interest and exchange rates. This is termed as the International Fisher effect. The rise and fall of currency values directly match the economies’ interest rates’ rise and fall. When rates of interest in the US are higher than the European values, the USD is stronger than the Euro. Vice versa, when the Eurozone interest rates are higher, the dollar is weakened.
This effect did not happen in the third quarter last year (2017).The USD seems to be weak even though the Federal Reserve Bank has increased the interest rates three times last year. This is predicted to happen this year too. As far as the Eurozone is considered, interest rates were last increased in the year 2011. However, the value of the Euro is still seen to be strengthening.
Therefore, as far as today is concerned, interest rates do not seem to indicate, or cannot be considered as one of the most important factors that affect the value of the EUR/USD currency pair. However, this may not be true for always. It can change anytime.
Conclusion
The EUR/USD currency pair is one of the most important pairs traded in the currency markets. This is because it is from two major economies of the world. When traders want to trade this pair successfully and to their advantage, they should take many factors into consideration including timing of the sessions when the pair is traded actively, comments from individuals with influence and fiscal decisions of major institutions that can create volatility, political instability, and economies reports that are conducive to growth of the economies as well as contributory to their health.