Foreign Exchange Rate Trading EUR/USD
The Euro and US dollar is a very popular pair; trading opportunities are not easy to come by but they are there. This does not stop forex traders from trading the pair. It is the globe’s most liquid pair and offers extremely low spreads, but there is always liquidity if you want to buy or sell. This regular activity offers high volatility levels which often lead to trading profits.
This combination of volatility and liquidity makes this one of the best pairs for newcomers to the forex market to trade.
The Role of the US Dollar Foreign Exchange Rate
The US dollar has a special place in the international finance world. It is accepted as the world’s reserve currency, hence most international transactions are settled using this currency. For companies, this makes the foreign exchange rate extremely important. Most central banks hold large US dollar foreign reserves. There are smaller countries that opt to fix their domestic currency to that of the US dollar. The price of gold and other commodities are set in US dollars. This means that every time a country buys or sells a commodity, it is also buying or selling US dollars.
The popularity of the US dollar in currency pair trading makes it vital for new forex traders to learn as much as possible about this currency. You need to know what drives the US economy to understand the direction the dollar may take.
The EU is representative of the largest economic region in the world, with a gross domestic product in excess of $13 trillion.
The euro is a single currency used by 16 European countries within the EU. You will often read about disagreements among these government regarding the future of the EU and its monetary policy. When this happens, as is to be expected, the euro will generally take a dip.
The main factor that influences this currency pair is the strength of one’s economy to the other. A US economy that is growing at a more rapid rate will cause the dollar to strengthen against the euro, and likewise, an EU economy that grows faster will cause strengthening of the euro. A key factor of the relative strength of these two economies is the interest rate level. In cases where the US rates exceed those of major European economies, it will cause the dollar to strengthen. If the EU rates are higher, it will cause weakening of the dollar. However, interest rates on its own are not a predictor of the movements in the foreign exchange rate.
Political instability related to any of the countries in the EU is a strong influence on the currency pair. The euro is also a relatively new currency which was only introduced during 1999. There are global economists who view the EU as a test project in monetary policy and economic policy. Differences of opinion often arise among the different countries that make up the trading area. If the differences appear to be serious according to what is reported, it causes the euro to fall drastically to the US dollar.