Formed by two of the largest currencies in circulation, the EUR (Euro)/USD (United States dollar) currency pair continues to be one of the most actively traded assets in the world. Currently, the Euro ranks second behind the US dollar in regard to global liquidity.
Given that the unit is made up of two of the most important economies in the world, the pair is also considered a ‘major’. This term is used to label the most central currency pairs in the world. For traders who are not aware of how currency pairs are structured, the EUR (in this case) would be considered the base currency, which always remains at one unit, with the US dollar representing the counter currency, or quote currency. The value of the counter currency fluctuates daily and communicates to investors/traders how much it will cost (in USD) to purchase a single unit of Euro.
Important organisations that surround the EUR/USD
Whether or not one actively invests in the financial markets, the majority of the world know, or have at least heard of, the Federal Reserve of the United States, or more commonly referred to as ‘the Fed’. This is the central bank for that country, chaired by Janet Yellen who took office in February 2014. Its main objective is to direct general economic policy. The board of governors meet several times throughout the year to discuss US monetary policy and announce its target interest rate. Generally, if interest rates remain unchanged, attention will then be drawn to the tone of the FOMC, which is the Federal Open Market Committee. Investors typically look for dovish/hawkish clues in the Fed’s dialogue, which, more often than not, will cause volatile price action on the EUR/USD.
While the Fed commands respect, it’s not the only institution to affect the EUR/USD. The European Central Bank (ECB) sets and implements monetary policy for the Eurozone. When President Mario Draghi, who has served since November 2011, takes to the stage, the market most certainly listens!
Some economic influences that affect the EUR/USD
Although the US and European central banks are important, there are other major economic releases that can cause the currency pair to fluctuate, and eventually force the central banks to intervene and alter rates:
- Inflation figures. Inflation refers to the rate at which prices for goods and services rises. If inflation continues to climb (check CPI and PCE indexes) this may spur the Fed, or ECB, to hike interest rates. What this does is make things more expensive and therefore generally slows consumer spending. By the same token, deflation will likely see the two noted central banks lower interest rates in an attempt to encourage more spending.
- Employment data. The aftermath of the monthly US non-farm payrolls report generally produces a sizeable reaction on the EUR/USD. Getting caught on the wrong side of this beast will not be a pretty sight! Employment numbers for the Eurozone’s major economies such as Germany and France should also be underscored!
The above two are what we’d consider to be major league. Yet, there are others that also deserve consideration, including, growth data (GDP), retail sales, trade balance etc.
Basic correlations for the pair are as follows:
- EUR/USD is typically inversely correlated with the USD/CHF.
- GBP/USD and the EUR/USD are positively correlated.
- The US dollar index can be used to determine the overall strength of the dollar, and thus can signal potential turns in the EUR/USD market, given the Euro’s weight within the index (over 50%).
- EUR/USD and gold have an interesting positive correlation. The main reason for this has been the shared perception of gold and the Euro as alternative investments to US dollars.
Most active hours
Effectively the EUR/USD pair trades 24 hours a day five days a week. Still, it is not always active! Personally, we’ve found the EUR/USD to gain traction going into the London open. This typically continues throughout London trade, and follows into the US segment. Though, the pair tends to slow down somewhat during the US afternoon.
Of course, there is a great deal more that affects the EUR/USD. What we have attempted to do in this article, however, is give you a foundation, a starting block if you will, to continue research.