The single currency – euro (EUR) was introduced by the countries of the European Economic and Monetary Union in early 1999. After that, the exchange rates of the national currencies of the participating countries were firmly fixed against the euro and trading began.
For the first decade, the pair’s exchange rate changed under the influence of decisions of the World Central Bank, the FRS and representatives of the European Commission. Since 2008, the euro/dollar exchange rate has fluctuated in the range from 1.039 to 1.598. This range generally varies from almost equality – almost 1:1 to about 1.60 dollars. From 2008 to 2014, the euro rarely cost less than $1.3, but between 2014 and 2015, it fell to about 1.04. For three years, the exchange rate remained relatively limited in the range between 1.04 and 1.15 until a break above 1.22 at the beginning of 2018.
The exchange rate of the euro to the dollar is influenced by many economic factors, as well as political events on both sides of the Atlantic.
The power of a pair is incredible. The US dollar is the most traded and widely used currency, the euro is the second most popular currency in the world. EUR/USD covers two major economies: European and American, so the pair account for more than half of the total trading volume in the world on the Forex market. Now, let’s get to the key factors.
Traders need to know when a pair can have the most volatility and when it is hardly being traded. Usually, the pair is not traded much during the Asian session because the most important economic data and events for EUR/USD are published during European or American sessions. Activity slows down at noon, when traders have lunch, and increases again after the start of the American session. Liquidity leaves the market again at 5:00 GMT when traders in Europe close their positions.
The most important institutions that influence the pair are the Central Banks of Europe and the USA. The European Central Bank under the leadership of Mario Draghi and the Federal Reserve Bank with Jerome Powell as chairman regulate monetary policy, money supply, interest rates, and the strength or weakness of the currency as a result. The market follows each meeting of the Central Banks and speeches delivered by the president and chairman. This creates volatility in the Forex market.
Any political issue can affect the EUR/USD pair. For example, Brexit, crises in European countries, and elections in countries with the largest economy in the European Union. It is worth mentioning the statements of politicians. For example, US Treasury Secretary Stephen Mnuchin said that “a weaker dollar is good for the United States.” This statement caused an immediate drop in the dollar in price.
Every week, the economic calendar offers a huge amount of data. Let’s note the most important items that every trader should take into account:
The balance of payments shows how much money a country receives from abroad and how much it pays to other countries.
According to economic theories, there is a relationship between interest rates and exchange rates. This is called the International Fisher Effect. Indeed, in most cases it is. Typically, currencies grow and fall in accordance with the interest rates of economies. For example, when US interest rates are higher than in the European Union, the US dollar strengthens against the euro. On the contrary, a rise of interest rates in the eurozone weakens the dollar. Summing up, it is important to say that the EUR/USD pair is the main pair in the foreign exchange market because it combines the two main economies.
If traders want to successfully trade EUR/USD pair, they should take into account many factors, such as sessions during which the pair is being traded more, institutions and individuals whose comments and decisions create volatility, political instability and, of course, economic reports that show growth and health of the economy.