How to Trade EUR/USD on Forex
Today, I will deal with the most popular Forex trading asset – the EUR USD pair. We shall dive into the history of EUR/USD, explore modern trends, and have a look at euro-dollar trading strategies. This overview will be of interest to both beginners and professionals!
The article covers the following subjects:
The EUR/USD Pair Overview
The EURUSD pair is the most popular forex trading asset, also known as the major currency pair, which is justified. Trading the EUR/USD forex pair accounted for almost a quarter of all FX trades, according to the BIS survey. Its main competitors, USDJPY and GBPUSD, account for about 13% and 9%. Therefore, the EUR/USD is the most traded pair.
Structure of Forex operations
The popularity of the EUR/USD currency pair is fueled by high media attention and investors’ demand. From 2016 to 2019, the Forex daily trading volume increased from $5.1 trillion to $6.6 trillion, while the share of EURUSD increased by almost 1%. It’s about $600 billion!
The USD history began after the proclamation of the United States’ independence in 1776 when the dollar became the local currency. The influence of the greenback, as the dollar is called because of its color, increased significantly after World War II. The British pound could not compete with the dollar due to the weakness of the UK economy. For a long time, Europe had been hatching a design to create a currency that would outperform the US dollar. As a result, in 1999, the euro emerged – a single currency for 19 member countries of the Eurozone.
A lot of time has passed since then. Trading the US dollar is dominant in the Forex market. According to the IMF data, the greenback’s share in the FX reserves of the world’s central banks as of December 2020 is 59.5%, the share of the euro is 20.6%. However, we cannot say that the single European currency is not a competitor to the US dollar. Before the euro introduction, the share of the US dollar exceeded 71%.
Structure of central banks’ foreign exchange reserves
EUR/USD trend in 1999-2021
The EURUSD features quite high volatility. In the beginning, the EUR/USD currency pair was trading below parity. However, starting from 2022, the euro has never been below $1. The euro-dollar all-time low is 0.82; the record high is close to 1.604.
EURUSD Lately Trends EUR/USD
In 2020, the global economy faced a recession, which lasted for only two months. Because of the panic in financial markets, the demand for the greenback sharply increased. As a result, the EURUSD dropped to a level of 1.064, the lowest since April 2017 (1).
Central banks launched colossal monetary incentives of trillions of dollars to support their economies. The Fed was even called crazy because of a sharp federal funds rate cut from 1.75% to 0 and the start of the QE at a monthly pace of $120 billion. The Federal Reserve balance sheet was growing rapidly, approaching $9 trillion, and the US dollar weakened against a basket of major currencies. In particular, the euro, from January to March, was almost 16% up and reached $1.234 (2).
EUR/USD trend in 2020-2021
In late 2020, the euro was expected to be trading up. Many banks suggested the EURUSD should have exceeded 1.25 in 2021. Some aggressive bulls expected the euro around $1.3. In reality, things turned out to be different. Due to the slow vaccination in the EU, which turned into new lockdowns and a double recession, the euro collapsed to 1.1705 (3).
Thanks to vaccines, investors became reassured in the global economic recovery. Furthermore, the EURUSD buyers were again encouraged to invest in Euro Dollar by a successful vaccination campaign in the EU and the Fed’s unwillingness to recognize a surge in US inflation. The pair was up to 1.226 in late May (4). Bulls again were aiming at 1.25, but the FOMC June projection broke the uptrend again. The Fed started talking about a potential federal funds rate hike in 2022, which encouraged investors to buy the US dollar.
Factors Moving the Euro / US Dollar Currency Pair
The EUR/USD trend depends on what stage of the cycle the global economy is. During a recession, the demand for safe-haven assets, including the US dollar, increases. As a result, the euro dollar goes down.
During a recovery from recession, investors are not that focused on preserving the money. Retail investors search for ways to multiply the deposit. At this stage, the fundamentals driving the EUR/USD currency pair are the GDP growth rates and the monetary policy of central banks.
A strong economy is a strong currency. The rapid rebound of GDP after the recession is a reason to buy securities of the country. In particular, the belief that the US economy will fully recover from the 2020 recession in the second quarter of 2021 and exceed its potential level in 2022 contributed to the S&P 500 rally by 18% from January to early August. As a result of the capital inflow into the US stock market, the US dollar was strengthening.
The GDP rate is a reliable indicator but, unfortunately, lagging. The GDP report is published a month or month and a half after the end of the quarter. Therefore, it is very difficult to determine whose economy is growing faster at a particular time, which doesn’t provide a clear picture of the current economic situation to investors. That is why forex traders have to monitor some leading indicators, such as the US and Eurozone PMIs.
Dynamics of US PMI and GDP
The more the economy heats, the more likely the central bank to phase out the quantitative easing program and hike the interest rates. As a result, the assets denominated in the local currency grow more attractively. That is why the US dollar is currently strengthening against a basket of major currencies.
To understand the Fed’s intentions, one should track such indicators as inflation and unemployment rate. When these indicators reach the thresholds set by the Fed, the central bank starts scaling back monetary stimulus. In this case, the greenback will grow in value.
Speeches of central banks representatives are important in forecasting the EUR/USD exchange rate. The officials’ comments give a clue on how the central banks’ policies could change, and investors could develop trading strategies based on this.
Every day, I carry out the fundamental analysis of the euro-dollar pair and study all the factors influencing the pair’s quotes. Follow my daily forecasts in the LiteForex trader blog and learn about potential changes in the eur usd exchange rate.
Best Time to Day Trade EUR/USD
You can trade Forex round the clock, at any time when it is convenient for you. The Forex market operates 24 hours a day from Monday till Friday.
0:00-9:00 UTC – Asian trading session
07:00-16:00 UTC – European trading session
13:30-22:30 UTC – American trading session
The volume of transactions usually increases during the crossover of several trading sessions: from 7:00 UTC to 9:00 UTC and from 12:30 UTC to 16:00 UTC, when Asians close intraday positions, and Europeans, on the contrary, enter the market. The same is true for the crossover of European late afternoon and New York morning trading hours is normally the most active.
According to BIS research, London is the major trading centre. In 2019, it accounted for 43% of all Forex trader activity. The capital of the UK is the center of the European session where EURUSD, GBPUSD, USDCHF, EURGBP, and EURCHF are mostly traded.
The second largest trading centre is New York, the share of which in the total volume of Forex transactions is 17%. Other trading centres are Singapore (7.3%), Hong Kong (6.7%), and Tokyo (6.1%). Americans prefer to trade the Euro Dollar, USDCAD, and other dollar pairs. The Asian trading session has its favorites – the USDJPY currency pair, as well as AUDUSD, AUDJPY, NZDUSD, NZDJPY, and others.
What is the best time to trade? If you are not going to invest a billion dollars in one trade, liquidity is not a problem. Increased volatility is observed during the crossovers of trading sessions. At that time, the news is actively published. In general, it all depends on the EUR/USD investing strategy that you apply.
EURUSD Technical Analysis
Freedom of creation – what could be better? EURUSD is a highly liquid financial instrument, so you can use absolutely any technical analysis method to predict the future price of EUR/USD. Are you a fan of Price Action? No problem! Do what you like – discover the repeating chart patterns and use them to determine entry points. Are you fond of indicators? You can apply any reliable indicator, MACD, RSI, Stochastic, or ADX. Everything will work in trading EURUSD.
Do you prefer the market profile, VSA, Elliott wave analysis, Keltner channels, or margin zones? Any ideas within these areas can be implemented on the euro dollar chart in MetaTrader. The trading approach should satisfy the trader and yield a positive result. Remember, every pip contributes to your deposit.
Technical analysis in the EUR/USD chart
My colleague writes daily technical analysis and shares the EUR USD trading signals based on margin zones in the trader blog.
EUR/USD Forex Trading Strategies
In Forex trading, only strict adherence to the trading system rules allows one to save the deposit and increase the capital. Below, I will analyse several trading strategies that have proved to be profitable among Forex traders. Examples here refer to day trading, but the strategies will work in intraday trading as well.
Moving Average Crossovers
Moving Averages are a simple and efficient tool for trading Forex. When the MAs frequently cross the EURUSD chart, it means consolidation. Otherwise, if the MAs rarely meet with the price chart, it signals a clear trend. During such a period, there is an opportunity to trade EUR/USD on the continuation of the ongoing trend.
Rules to buy the EURUSD:
The trend is up.
The price chart crosses the 14-day moving average downside.
The breakout bar or candlestick closes above the EMA-14.
Set a buy order at the high of the breakout bar.
Rules to sell the EURUSD:
The trend is down.
The price chart crosses the 14-day moving average upside.
The breakout bar closes below the EMA-14.
The sell price is at the low of the breakout bar.
EURUSD daily chart:
As you see from the USD price chart, the strategy is successful amid a clear trend. If the trend is broken, a trader will face a loss. There should be a stop loss to ensure negative balance protection.
Pullback and Breakout
Traders often say that the market is boring when it is trading flat (consolidation). In fact, one should pay much attention to the Forex market when there is not a huge range of price fluctuations. Experienced traders know that big traders (funds, institutional investors) get in the game when the market seems to be trading flat and there is little trading activity. As a result, there emerges a general trend.
Conditions to buy the EURUSD:
Consolidation (sideways trend).
Price tests the channel’s upper border and rolls back.
Price retests the upper level after 2-5 bars and closes above the upper border of the consolidation range.
Enter a long at the breakout level or at the level of the breakout bar’s close.
Conditions to sell the EURUSD:
Price tests the lower border of the channel and rolls back.
Price retests the lower level after 2-5 bars and closes below the lower border of the consolidation range.
Enter a short at the breakout level or at the level of the breakout bar’s close.
EURUSD daily chart:
After the price goes beyond the consolidation range, it often retests it, goes back to the border of the range. In this case, there appears another entry point. In our example, this happens in the second case.
Follow planned events
Large traders always plan their actions. Banks and hedge funds understand that they are not the only participants in the market. A strong opponent can appear at any moment. Therefore, all trading decisions must be justified. Investment ideas are often based on the fundamental analysis of the market. In this context, news trading takes on a special character.
Important events planned in the economic calendar include reports on inflation, employment, GDP, PMI, meetings of the ECB and the Fed, as well as the presidential elections in the USA or parliamentary elections in the EU countries. All these planned events could result in radical EURUSD price movements.
Daily EURUSD chart:
In early March, the Fed Chair didn’t express any concern about the S&P 500 drop. Investors were puzzled, as they believed that the central bank should spare no effort to support the US equity market. Therefore, the demand for safe havens surged, and the EURUSD crashed.
In early May, a weak reading of the employment data encouraged the EURUSD bulls to go ahead. The indicator was almost four times less than Bloomberg experts expected.
In mid-June, the Fed signaled a possible federal funds rate hike in 2022, and the euro uptrend was broken.
If trade on the news, you should observe the following rules:
If the EURUSD starts consolidation ahead of an important event, you should put a buy order above the upper border of the consolidation range, a sell order – below the lower border.
If the forex pair is rising or falling a few days before an important report publication or a central bank’s meeting, one could follow the ‘buy the news, sell the facts’ principle.
A stop-loss will limit the potential loss. A stop loss is necessary for balance protection because the volatility increases when the important news releases.
EUR/USD CFD Trading
The international foreign exchange market has been rapidly evolving since the abolition of the Gold Standard 50 years ago. Nonetheless, a retail investor couldn’t enter Forex for a long time. The reason is the high minimum lot price of $100,000, which only banks and investment could afford. The advent of CFDs or Contracts for Difference in the 1990s allowed individual investors to enter the Forex market.
If a trader is interested in the differences in the exchange rate of EUR/USD rather than in the currency itself, why enter a trade for $100,000? Suppose you have a couple of US dollars, preferably $1000, on your account. Any ECN or another Forex broker provides 1:100 leverage, and you can buy EURUSD at the rate of 1.17. The growth of the eur usd forex pair quotes to 1.18 will allow you to double your capital. If the euro is down to $1.16, you will lose your money. Individual traders usually apply a Meta Trader platform, MT4 or MT5, or another trading platform.
CFD trading means quite a risk, but the potential profit is worth it!
EUR/USD Trading Tips
A necessary condition to buy EUR vs USD in the long term is the sync trends in the global economy. If the US GDP features a robust growth, but China and the euro area face problems, sell the pair.
Monitor the commodity and stock markets. If the S&P 500 and oil are rallying up simultaneously, it is a reason to buy the Euro versus US Dollar. If the stock index is growing and the black stuff is falling in value, or both financial assets are depreciating, it is relevant to sell the EURUSD.
Study the history of the financial asset’s quotes. An example that took place in the past may emerge in the future as a potential EUR/USD price movement.
Use moving averages in trading the EUR/USD to determine the current market state. If the MAs often cross the EURUSD chart, the market is trading flat. If the price chart is above the EMA, the trend is bullish; if the price is below the indicator, the underlying trend is bearish.
Do not try to use all popular trading strategies; you’d better find the one that suits you best.
Always observe the rules of your trading system.
Therefore, you can make quite a profit from trading the EURUSD. Choose the most suitable trading system for you, monitor central banks’ statements and the economic calendar. And most importantly, always learn! You will become a successful trader if you understand the market processes.
Take into account Asian, European and American trading sessions. Remember factors driving the currency rates, technical analysis, and trading strategies. Distinguish between trading flat and a trending market. Bear in mind that general trends of EUR/USD could change at any time. Study the fundamentals and increase your knowledge base. I wish you success on your way to professional Forex trading!
Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.