Euro Dollar – EUR/USD

Often represented by the abbreviation EUR/USD or EURUSD, the euro dollar currency pair is the most frequently traded pair in the world. Its’ daily turnover is said to be close to 3 trillion dollars! This is due to the fact that the euro and U.S dollar are the currencies used by the two largest trading blocs in the world - Europe and the United States of America.

Since this it is the most frequently traded currency pair, it is characterized by high liquidity and low spreads. It is also characterized with financial and economic data availability and high volatility. All this makes the EURUSD extremely popular with traders.

Influencing Factors

Every currency pair has a set of factors which affect its value. The value of the euro usd is intrinsically linked to the euro and U.S dollar value, which are affected by a number of influencing factors. Knowing and following these factors allow investors to better their EUR USD forecast and help them improve their profits when trading the pair.

The major factor is the economic situation in the US and Europe. A strong, growing economy has a positive impact on the value of its currency. The strength of the economies is often represented by a series of economic parameters and publications released by the US and EU governments and central banks. Important releases to look for are: GDP, jobless claims, consumer sentiment, consumer confidence, Consumer Price Index (CPI) and PMI Manufacturing Index, but there are many others.

Another important factor is the interest rates of the European Central Bank (ECB) and the Federal Reserve (Fed). For example, if the Fed raises its interest rate, this will probably strengthen the U.S dollar. This will subsequently weaken the Euro in relation to the USD resulting in the fall of the EUR USD rate. The reverse is true when the ECB hikes its interest rate.

Geopolitical developments or instabilities may also have an impact on the value of the currencies. The recent instability in the EU countries has had a negative impact on the Euro value and subsequently the value of the EUR USD as well.

Trading the EURUSD

The forex market is essentially a 24 hour a day market with the U.S trading session (New York) opening at 8:00 am to 5:00 pm (EDT), the Asian trading session from 5:00pm to 2:00 am (EDT) and the European trading session from 3:00 am to 12:00 noon (EDT). Although this means that you can trade the forex market all day long, it is not necessarily a wise thing to do. The ideal trading conditions for any forex pair is when there is active trading going on generating both liquidity and volatility for the currencies traded. The same conditions apply for the EUR/USD. There are certain times during the trading day when the this pair is actively traded and will create enough volatility to generate sufficient profit to cover one’s trading costs. These active trading times occur when the European trading session overlaps with the U.S trading session.

In order to capture the largest moves for the euro dollar pair, traders should concentrate their trading activities specifically within the 4 hour overlapping window as shown in the diagram above.

Trading Instruments

There is a variety of ways or vehicles in which you can trade the EURUSD. These include trading across Options, Binary Options, Contracts for Difference (CFD), forward contracts and of course the Spot Forex market. Before choosing the instrument for the trading activity it is extremely important to be familiar with its characteristics and fit to the trader’s needs. For example, with spot forex and CFD a key advantage is the ability to trade on margin. A spot forex trader can leverage his limited investment capital many times over through the leveraging facility offered by most forex brokers. Nevertheless, it leveraged trading is a double edged sword. So while it is entirely possible to multiply one’s profit potential many times over with leverage, it is also possible to magnify one’s trading losses as a result of leveraging.