Why is the EUR/USD Pair a Popular Choice in Forex Trading?
The Euro and the United States Dollar are the two biggest currencies in the world, and represent the globe’s largest trading and economic blocs. This is the reason why numerous multinational corporations conduct their business within both Europe and the United States, having offices on both continents, and have a continual requirement to hedge their exchange rate risk. These firms therefore are always involved in trading EUR to USD and USD to EUR.
As the EUR USD pairing is so popular, there are virtually no arbitrage opportunities, yet this currency pair is still one of the most common chosen by Forex traders. As it is also the most liquid currency pairing in the world, the EURUSD offers low bid-ask spreads as well as constant liquidity for investors who want to sell or buy. The popularity of this pairing is increased because both of these features are of incredible importance to speculators. Due to the vast numbers of market participants and constantly available financial and economic data, traders are able to consistently re-examine and formulate their opinions and positions on this currency pair, and the constant activity allows for high volatility levels leading to great opportunities for traders to make a profit. The combination of volatility and liquidity makes the EUR USD pair a great place for newcomers to Forex trading to begin their exploration of the financial markets, however they should also bear in mind that a good understanding of risk management is essential when trading foreign currencies.
Facts About the US Dollar
The United States Dollar has its own very important and unique role to play in the international finance world. As the globe’s most commonly accepted reserve currency, the American Dollar is used in settling the majority of international financial transactions and the central banks around the world hold a large proportion of their foreign currency reserves in US Dollars. Many small countries either opt to peg the value of their own nation’s currency to the Dollar or even use the US Dollar as their own currency in place of developing one of their own. The US Dollar is also used to set gold prices and the prices of many commodities as well as being the currency of choice for conducting OPEC oil transactions. The combination of these factors all contribute to making the US Dollar the most important currency in the world. As the US Dollar is also the most frequently traded world currency, the majority of foreign currencies trade against it more frequently that in any other currency pairing. Therefore, any investor who is embarking upon Forex trading should develop a firm understanding of the factors which drive the American economy and pay attention to the direction in which the Dollar is heading.
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The Euro and the Economy of the European Union
Overall, the largest economic region in the world is the European Union (EU) with its GDP which exceeds $13 trillion. Similar to the US, the European economy is focused heavily on services however manufacturing represents a larger percentage of Europe’s GDP than in America. When there is strong economic activity in the EU, the Euro usually becomes stronger, and when there is a slow down in European economy activity, the Euro generally weakens. The Euro is unique in the currency markets because, while the American Dollar represents the currency of just one country, the Euro is a single currency of the Eurozone or EMU (The European and Economic Monetary Union) – the 16 different countries in the EU. There are sometimes disagreements which occur between the various governments within the European Union about the union’s future course or its monetary policies. When these economic arguments arise, the Euro usually weakens. The countries that are currently part of the Eurozone include:
- The Netherlands
Which Factors Affect the EUR/USD Pair?
The main factor which has an influence upon the direction of the EURUSD pairing is the two economies’ relative strengths. When the United States’ economy is growing more quickly, the USD will strength against the EUR, whereas if the European Union’s economy is growing more rapidly, the Euro will be stronger against the US Dollar. The level of interest rates is a major indicator of the relationship between the two economies’ strengths. If the interest rate in the United States is higher than the interest rates of major European economies, usually the US Dollar will grow stronger. However if interest rates in the Eurozone are higher, usually the Dollar will weaken.
Another primary factor with a major influence upon the EUR/USD relationship is political instability within the EU itself. In comparison to most of the major currencies in the world, the Euro is a fairy new currency having only appeared on the scene as recently as 1999. This results in some differences arising between the governments of various Eurozone countries in opinion and monetary policy and when the differences seem to be a potential threat to Eurozone future stability it is almost certain that the US Dollar will be stronger than the Euro. This means that when an investor wishes to trade the EUR USD pair, they should pay close attention to any political news from European countries that may indicate any instability in the EU economy.
What are the Advantages of Trading the USD/EUR Pair?
There is considerable interest among Forex traders in the USD EUR currency pair because of the many benefits that come from choosing to trade in these currencies. Here are some of the advantages:
- The EUR/USD pairing has a very active trading environment.
- The EUR USD has an exceptionally competitive pricing environment which leads to greater profits for investors.
- There are multiple spread types available when trading in these currencies including CFDs and ETFs.
- The EUR to USD currency pair are now used for 30% of spot trades.
- 90% of spot trades are carried out in US Dollars.
- 40% of spot trades are made in Euros.
- Swing profits are another benefit to choosing the EUR/USD pair.
Investors are always seeking the best possible investment when they select a currency pair for investment. Choosing the EURUSD pair enables traders the best opportunity of profiting, and high liquidity in this particular market as well as competitive pricing can have the effect of increasing the investor’s chance of making a profit rather than a loss.