If you are interested in the foreign exchange market and have studied Forex and its operation a little, you certainly know that the exchange rate of currency pairs such as the EUR/USD is very often influenced by what is called the currency interest rate. These rates that set by central banks, are in fact studied by traders before their positions are taken. Here are some tips to analyze the EUR/USD exchange rate
Before January 2000, and therefore before the introduction of the euro, the EUR/USD pair was quoted at 1.18. Which means in practice that one euro was valued at $ 1.18. Following the introduction of the single currency, we first witnessed a sharp decline with a record low reached in May 2000 which brought the euro below $ 0.83. However, from this moment the Euro has not stopped progressing compared to the greenback up to the 2008 crisis. Starting from November of that year the EUR/USD was, in fact, depreciated by about 23% before gradually recovering the lost points. If the dollar is commonly recognized by specialists and traders as a safe haven, the euro does not suffer in a systematic way because economic and political current events play above all in its favor. Currently, despite a difficult situation in relation to the debt of some countries in the Euro zone, the single currency benefits from a policy of raising interest rates by the ECB, which makes it a very popular asset for investors.
Which Organizations Set EUR/USD Rates?
It is therefore the central banks that set and update the currency interest rates. For the euro it is the ECB or the European Central Bank that is in charge of it, while for the dollar it is the FED or the Federal Reserve that deals with it. These interest rates are published weekly in the economic calendar.
Why Interest Rates Affect The EUR/USD?
A currency’s interest rates represent a potential additional gain for a trader who owns that currency in order to resell it. So the higher the rate of a currency, the more this currency has opportunities to attract investors who see a higher return opportunity. It is therefore essential to follow the publication of these interest rates and their evolution over time to analyze the course of the EUR/USD pair and to know in which direction it is preferable to treat it or in which direction there are more chances for the trend to evolve.
In order for your EUR/USD position statements to be effective, you must of course use a technical analysis and a fundamental quality analysis at the same time. As for the fundamental analysis, we offer here some tips that will be very useful to you. The EUR/USD currency pair is part of the most popular exchange rates among the many Forex currency pairs, which can be explained by the fact that this pair connects the two largest economies in the world, that is the economy of the Euro zone and that of the United States. Much more than a simple indicator of the exchange rate between the two currencies, the EUR/USD pair is also an excellent indicator of the economic health of these two geographical areas. Moreover, and in the opposite direction, the value of EUR/USD has an important impact also on the growth of these two areas.It is also important to understand that the main players that speculate on the foreign exchange market, and therefore on the EUR/USD quotation, are the companies that use the purchase of foreign currencies at the best possible exchange rate to finance their international transactions. European companies that have to buy products in the United States, for example, to reduce costs buy dollars when their prices are attractive. Obviously this also works in the opposite direction since these companies sell currencies, always in Forex, to recover the profits of their branches based abroad or payments from foreign customers. To make sure they get the most convenient exchange rate and thus realize economies or make significant profits, these large companies make use of the services of financial brokerage specialists, very often banks, which carry out these operations in Forex in their place.
To this end, intermediaries hire analysts specialized in the foreign exchange market who are able to better anticipate the evolution of currency exchange rates between them. They can thus advise their clients and reduce the level of risk that this type of transaction represents. Obviously, as independent investors, you have the same analytical capacity as the banks when you know the fundamental factors that most influence EUR/USD, of which here are the most important.
- First of all, you must logically always follow the geopolitical conditions concerning the two currencies, namely the euro and the dollar, with a careful eye. It is known in particular that when the situation between the United States and the Euro zone or other parts of the world is tense or unstable, it is usually the euro that is paying the price, as has happened in particular recently on the occasion of the crisis in Ukraine that caused it a fall of the ruble, the Russian currency, but also a fall of the euro against the US dollar.
- The second element to be considered as a priority in its fundamental analysis of the quotation of the EUR/USD concerns the monetary policy conducted by the major central banks. We recall that in this case we are talking about the ECB (European Central Bank) for the euro and the FED (Federal Reserve). Indeed, these large central banks have the power to activate specific monetary policies to push the economic growth of their countries or group of countries or to cope with an economic crisis.
To this end, they have a formidable weapon in particular: interest rates. A drop in interest rates will in fact result in simpler lending conditions, logically leading to a fall in the price of the currency involved. Thanks to these geopolitical effects on the EUR/USD quotation, it is possible to easily anticipate the future developments of this pair by studying in particular the reports of financial analysts or based on the consent of the latter. All this information is obviously available from your broker. The more technical indicators are used simultaneously, the more chance there is of making quality forecasts on future EUR/USD changes. Being a currency pair that enjoys a very strong volatility, the investment possibilities are numerous but sometimes risky. For this reason, it is important to compare the results obtained with one’s own technical analysis with the signals deriving from the fundamental analysis.
Now that you know how to carry out a coherent fundamental analysis of the EUR/USD course you must obviously learn to prepare a good quality technical analysis. In fact, even if the geopolitical and economic context has a great influence on this currency pair, the reverse phenomenon is also clearly visible. A weak currency, therefore, will have the direct effect of favoring exports from one country to another, at the same time curbing imports and domestic consumption. A strong currency, on the other hand, will have the effect of favoring purchasing power and imports in the country while exports will be less competitive and interesting. However, it is not strictly necessary to go into the details of this type of market analysis to anticipate changes in the EUR/USD as stock market charts help visualize existing possibilities more clearly. In order to correctly use the technical analysis on the EUR/USD course it is first of all advisable to learn to understand the trends already in progress with sales or purchase movements, an operation that requires paying attention to choosing one’s own horizon of analysis well which it can be short-term for orders over a few minutes or longer, as it is possible to analyze these trends over periods spanning several years.
What Strategy Should Be Used to Trade the EUR/USD?
Now that you know the best techniques for analyzing the EUR/USD’s share price, you will certainly ask yourself which strategies to activate to trade this currency pair, or if you want to know the advantages of long and short term trading on this pair. We remind you, first of all, that the EUR/USD pair shows a very significant volatility that can be interesting for more experienced traders but also presents a relatively important level of risk, and this is especially true for short-term strategies. Professional institutions such as hedge funds that speculate on the EUR/USD course do so most of the time on large units of time, thus using at least weekly or daily charts.
This technique allows them to avoid the negative effects of volatility which can complicate things for short and medium term trading. Long-term trading must therefore be privileged if you wish to reduce the level of risk and take advantage of the generally well-marked underlying trends that this currency pair offers. The advantage of this type of trading is that it is essentially based on technical analysis, although it is also necessary to keep an eye on the economic news that can influence the pair. However, this strategy has the disadvantage of requiring significant investment capital with stop orders that are very far from the starting price to avoid closing its positions following micro-movements. Very short term trading is also conceivable but in this case it is necessary not to rely on underlying trends but on micro-movements.To do this, one must not hesitate to close one’s positions very quickly without necessarily reaching its basic objective to protect oneself from micro movements on the market and from the very strong volatility that can, at any moment, cause money to be lost. In this case, essentially rely on pivot points and on supports and technical resistances that generally represent good entry points on the market. Statements by central banks can also prove to be interesting as a starting point for one’s positions provided that the charts indicate a movement that follows the same direction. The scalping strategy is also a method of investing in the EUR/USD rate.
Tips for Trading the EUR/USD
The analysis of the evolution of the quotation of the EUR/USD currency pair on the foreign exchange market certainly requires a technical quality analysis but also a coherent and complete fundamental analysis carried out by monitoring some data from the economic calendar that can influence its variations. Here are the elements and indicators to be studied in this regard. Obviously, we must follow with great care the evolution of the interest rates of the euro and the US dollar that are set by the large central banks of the two areas, namely the ECB and the Fed. In general terms, it is good to follow any meeting important of these two entities and any publication or official declaration issued. Other factors, in this case economic, can influence the EUR/USD price. We must therefore keep an eye on all the macroeconomic statistics and indices of these areas including, for example, GDP and its evolution as well as purchasing power, consumer prices and other regularly published items. Finally, we can use the evolution of the main stock market indices of these two areas to assess their financial health and the influence it will have on their currencies.
The Most Appreciated Pair by Investor .The EUR/USD currency pair is certainly the ideal pair to invest online in the foreign exchange market. Begin immediately to speculate on the rise or fall of the quotation of this currency pair and implement analysis and strategies in itbfx.com.