Trading EUR/USD

You will learn about the following concepts

  • Introduction to EUR/USD pair
  • Most traded currency pair
  • Exchange rate factors/li>
  • Example

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EUR/USD is the most traded currency pair both in the Forex market, as well as in binary options trading. Due to its popularity, the EUR/USD pair is included in “The Major” group, which represents the most traded currency pairs all over the world. As of April 2013, trading in the EUR/USD pair accounted for 24.1% of the Forex market’s total turnover, implying great liquidity, while the USD/JPY cross had an 18.3% share and GBP/USD stood at 8.8%.

Liquidity is important because it causes prices to change gradually and trends to develop incrementally, as opposed to quickly occurring price changes at times of low liquidity and high volatility. Hedge fund speculators tend to act aggressive during periods of low liquidity, forcing other participants to do the same, thus rapidly moving the price. While this might be in favor of some trading strategies, for others it is not.

The value of the EUR/USD is quoted as 1 EUR per X US dollars. For example, if the exchange rate is estimated at 1.3000, this means that 1 euro is traded for 1.3 US dollars. Thus, you will need to sell 1.3 US dollars to purchase 1 euro. The first currency in the cross is dubbed “base currency” (in our case EUR), while the second pair is the so-called “quote currency” (in our case the US dollar).

Pips

When it comes to currencies, the movement in prices of currency pairs is measured in ”pips”. A pip is an acronym for the phrase “percentage in point”. This is the smallest price change, which a given exchange rate can make. Most major currency pairs are priced to four decimal places, so in this case, the smallest change is that of the last decimal point – for most pairs this is the equivalent of 1/100 of 1%, or one basis point. In reference to the example above, if EUR/USD rises to 1.3005, then the cross has gained 5 pips, while an exchange rate of 1.3050 means that the euro strengthened against the US dollar by 50 pips, and so on.

Changes in the EUR/USD cross have a broad effect on the financial markets. All commodities, which are priced in the US dollar, generally receive support when the greenback is pressured, and vice versa. Moreover, currencies which are pegged to the dollar or the euro are also affected by fluctuations in the EUR/USD cross.

CargoShip-iconAlso, due to the sheer size of the economies represented by the two currencies and their role in the international trade markets, a strengthening of each, which comes on the back of the other, tends to have a significant impact on related economies as well.

In order to accurately predict fluctuations in the EUR/USD currency cross using fundamental analysis, you need to be keep a close watch on all the news coming from the Eurozone and the United States. The single currency bloc commonly releases key economic indicators during the European trading session (generally between 06:00 GMT and 12:00 GMT), while data from the world’s biggest economy are typically streamed between 11:00 GMT and 14:00 GMT, apart from the FOMC policy meeting conclusion and the release of Fed minutes which are due at 18:00 GMT, and a few other releases. Unexpectedly upbeat or downbeat key readings from the world’s No1 economy, such as nonfarm payrolls, consumer sentiment etc., tend to ripple through the global financial markets.

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