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How to Trade the EUR/USD Forex Pair?

January 14, 2022
by Leon Marshall,

Article Recap

A EUR/USD refers to a comparison between the value of the euro, the common currency of the Eurozone, and the value of the United States dollar, measured by how many dollars are needed to purchase a euro.

A EUR/USD refers to a comparison between the value of the euro, the common currency of the Eurozone, and the value of the United States dollar, measured by how many dollars are needed to purchase a euro. The “Euro”, as the pair is commonly called, currently trades at 1.50, so one Euro costs one dollar and fifty cents.

A EUR/USD pair has the Euro as the base or transaction currency, and the Dollar as the counter or quote currency. Traditional Forex involves buying and selling the base currency and the counter currency simultaneously. Buying Euro at the same time as you are selling a Dollar is what it means to go long on the EUR/USD. In the opposite direction, whenever you are short EUR/USD, you are selling Euro at the same time as you are buying a dollar.

Factors causing EUR/USD price movements

When it comes to comparing the strength of the EU’s economy with the U.S. economy, the EUR/USD currency pair is one way to do so, since anything that affects either or both of these economies can affect the EUR/USD. Keep track of important economic events in Europe and the United States by looking at an economic calendar.

Forex pairs can be affected by a number of events, including the release of unemployment data in the United States or in EU member countries. EUR/USD can also fluctuate due to updates on interest rates and Treasury yields from the Federal Reserve or the European Central Bank.

Occasionally, moves and decisions by the EU Government that could affect the Euro may cause the EUR/USD’s value to rise; on the other hand, moves and decisions that strengthen the Dollar may cause the EUR/USD value to fall. Alternatively, a weak Euro can negatively impact the currency pair, while a weak dollar could cause it to rise.

Geopolitical uncertainty is another factor that can affect the Forex pair. Currency traders often monitor the relationship between the U.S. and the EU when tracking currency prices because the blocs are major trading partners. The EUR/USD exchange rate can be significantly impacted by instability.

Lastly, the U.S. and EU economies are heavily dependent on private sector activity, which can cause the Euro to rise or fall against the dollar, based on the performance of the major regional stock indexes.

For CFD traders, currency trading offers a number of opportunities. CFD trading involves monitoring the price movement of a currency pair in order to determine your profit (or loss). The underlying asset is not purchased or sold.

It is essential for traders to understand what factors cause price movements in the EUR/USD pair when trading this Forex pair. Understanding the implications of international events can be a huge advantage when trading this and other major Forex pairs.

       

Important fundamental factors influencing the EUR/USD currency pair

The euro dollar’s value is also affected by inflation and interest rates. A weaker currency is likely to be caused by higher inflation and lower GDP growth. The prospect of higher interest rates with similar GDP growth will strengthen a currency in comparison to a currency with a stable or lower interest rate outlook.

Therefore, it is necessary to keep track of GDP growth, unemployment, and inflation. For traders of the EUR/USD pair, these three factors provide a useful framework. You can track and compare US and Euro GDP growth on sites such as Tradingeconomics, as well as other economic data.

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Fundamental technical strategies

Now let’s examine a couple of basic technical strategies used in the EUR/USD market. Obviously, these aren’t foolproof but should be rather viewed as starting points from which to develop your own ideas.

Triple moving average

The first strategy we will discuss is the crossover of three moving averages. The moving average is calculated by finding the average close price for a specific period, in this case, the past 21 days. For each successive bar, it calculates average close prices over the prior 21 days, creating a 21-day price average. Afterward, the strategy creates two more moving averages; one with a period longer than 21 and one with a period shorter than 21.

It is possible to optimize the periods of each moving average, but traders should be careful about the curve fitting the data. A longer time frame also tends to make this strategy more accurate, making it best suited for trading daily charts. Whenever the market moves sideways, this type of trend-following strategy tends to give false signals.

EUR/USD chart breakout

Next, we will examine the breakout strategy, also well-known and generally profitable when executed properly. Any time frame can be used for this strategy, but a tight rectangle chart pattern is required. The formation appears more frequently on 30-minute and 1-hour candle charts, which is why it is best suited to these time frames.

One simple strategy is to search for rectangular formations – these usually occur during the less volatile hours of the trading session, late New York afternoon, and the Tokyo session. A breakout occurs when the price moves out of the rectangle’s range, creating a buy or sell signal. In order for the signal to be confirmed, the candle body must close outside the rectangle’s range. If a candle body closes above or below the range, it creates a buy signal and vice versa.

Wrapping up

In addition to the daily economic data releases, there are many factors a EUR/USD trader needs to be aware of. No matter if you are a day trader or holding positions for a longer period, you need to stay updated on all the major releases and the central bank’s statements. To create the most effective trading strategy, it’s always a good idea to mix technical and fundamental analysis.

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Trading on margin is high risk.

All times are AEDT.