EUR/USD As a Main Trader’s Asset
The currency pair EUR/USD is the ratio of the euro to the US dollar. In this pair, the euro is the basic currency, and the US dollar is the quoted one. This means that the quotation of the EUR/USD currency pair shows how many dollars are to be paid for 1 euro. For example, quotation EUR/USD 1.11 means that for 1 euro 1.11 dollars should be paid. The Euro and US dollar currencies are the main Forex market currencies, so the EUR/USD currency pair also refers to the main pairs, so-called majors. The reverse currency pair – USD/EUR – does not exist.
EURO (currency sign – €, bank code: EUR) is the official currency of the 19 “EU zone” countries. In total, the number of people using Euro is about 500 million.
USD – approximately 972 billion dollars in banknotes and coins circulates in the world. 16 countries of the world accepted US dollar as an official currency. According to the Bloomberg agency, for the period from 2013 to 2014, the share of the US dollar was 42% in the interbank turnover. At the same time, the share of the euro is 32%, and the yuan – 1.47%.
The EUR/USD currency pair is the most popular and liquid Forex pair. The pair`s trading volume is more than a third of the total volume of transactions in the international foreign exchange market. Due to a large number of professional traders on the exchange, it is difficult to predict the movements of this pair.
The euro/dollar pair quotations are sensitive to the fundamental factors, the main of which are the monetary policy of the ECB and the Fed in the bank rate sphere. It is also influenced by such data as GDP, employment level, sales volume, production and business activity indices.
The main indicator of the US dollar behavior in the Forex market is gold. The gold exchange rate dynamics is very important to determine the forecast for the dollar exchange rate. When the gold rate is growing – the dollar rate is falling. All the allied currencies against the dollar (EUR/USD, GBP/USD, AUD/USD, NZD/USD) are growing along with the gold exchange rate and, vice versa, are falling along with the gold rate during the dollar growth period. The dollar exchange rate also reacts to the change of the oil prices. When oil price grows – dollar rate falls. Thus, the forecast of the dollar exchange rate should be made considering the dynamics of gold and oil prices.
Some currency pairs move in the same direction, others in the opposite. Statistically, this ratio is called correlation and is measured on the -1 to +1 scale. In a case of an ideal positive correlation, currency pairs will move in the same direction 100% of the time. In a case of a negative correlation – on the contrary. This information will be of great use for those who trade several currency pairs simultaneously as the total risk exposure depends on this.
Two currency pairs demonstrate a strong correlation if the absolute value equals 0.7 or higher. Such pairs as EUR/USD and GBP / USD or AUD / USD and EUR/USD often move in one direction. An example of pairs with a strong negative correlation is EUR/USD and USD / CHF, AUD / USD and USD / CAD.
EUR/USD, GBP / USD, USD / CHF, USD / JPY are the most traded Forex currency pairs. They are followed by the currency pairs: USD / CAD, AUD/USD, and NZD/USD. These establish a group of so-called major currencies (majors) – they are united by the presence of the US dollar in each of the pair. These currency pairs are highly liquid financial instruments that are characterized by considerable volatility and, accordingly, have a great potential to make a profit.