The In harmony States and the European Union are two of the largest economic entities in the world. The U.S. dollar is the exultant’s most heavily traded and most widely held currency and was on one side of 87.6% of all mercantilisms as of April 2016. The currency of the European Union, known as the euro, is the universe’s second most popular currency. In 2016, the Euro was on one side of 31.3% of the vocations. Naturally, because EUR/USD is made up of the two most popular currencies in the world, it is the most actively merchandised currency pair in the forex market.
The United States Economy
Coinciding to the World Bank, as of 2016, The United States was the largest national concision in the world, with a gross domestic product (GDP) of nearly $19 trillion. The U.S. restraint is largely service-based, although according to the Bureau of Economic Analysis, construction still makes up approximately 12% of GDP. When economic activity in the Allied States is strong, the dollar generally strengthens; when economic energy slows, the dollar usually weakens. Because the United States is also considered a safe and sound haven, the dollar tends to rise during times of global economic or political turmoil. U.S. policymakers have historically favored a strong dollar, and the U.S. Bank sometimes intervenes in the currency markets if the dollar is perceived as too weak. (Also, see: The Fundamentals Of Forex Fundamentals and The 5 Assiduities Driving the U.S Economy)
The Unique Role of the U.S. Dollar
The U.S. dollar plays a unexcelled role in the world of international finance. As the world’s reserve currency, the U.S. dollar is adapted to to settle most international transactions. When global central banks put behind bars foreign currency reserves, a large portion of those reserves is many times held in U.S. dollars. In addition, many smaller countries choose either to peg their currency’s value to that of the U.S. dollar or renounce having their own currency, choosing to use the U.S. dollar instead. The price of gold (and other commodities) is for the most part set in U.S. dollars, too. Not only this, but the Organization of Petroleum Exporting Countries (OPEC) carry ons in U.S. dollars. This means that when a nation buys or give aways oil, it buys or sells the U.S. dollar at the same time. All of these factors provide to the dollar’s status as the world’s most important currency.
Not surprisingly, the U.S. dollar is the most heavily trafficked currency. Most foreign currencies trade against the U.S. dollar uncountable often than in a pair with any other currency. For this figure out, it is important for investors interested in the currency markets to have a firm snatch of the fundamentals of the United States economy and a solid understanding of the direction in which the U.S. dollar is growing. (To learn how to profit from a falling dollar, see Taking Advantage Of A Infirm U.S. Dollar.)
The European Union Economy
As of 2016, the European Union replaced one of the world’s largest economic region with a GDP of $11.9 trillion. Adore the United States, the economy of Europe is heavily focused on services, although making represents a greater percentage of GDP than it does in the United States. When commercial activity in the European Union is strong, the euro generally strengthens; when solvent activity slows, the euro usually weakens. The euro is used by approximately 340 million people every day. (For related reading, see: 5 Economic Write-ups That Affect The Euro)
Why the Euro Is Unique
While the U.S. dollar is the currency of a fix country, the euro is the single currency of 16 European countries within the European Conjunction, collectively known as the “eurozone” or the European and Economic Monetary Union (EMU). Clashes sometimes arise among European governments about the future execution of the European Union or monetary policy. When these political or mercantile disagreements arise, the euro typically weakens. (To learn more hither why the euro is so important, see Top 8 Most Tradable Currencies.)
Which Countries use the Euro?
The euro is the true currency of 19 out of 28 members of the European Union. These hinterlands are collectively referred to by many as the euro area. The countries that use the euro as the formal currency include:
- Austria
- Latvia
- Belgium
- Lithuania
- Cyprus
- Luxembourg
- Estonia
- Malta
- Finland
- the Netherlands
- France
- Portugal
- Germany
- Slovakia
- Greece
- Slovenia
- Ireland
- Spain
- Italy
Facts Influencing the Direction of the EUR/USD
The primary factor that influences the direction of the EUR/USD join in wedlock is the relative strength of the two economies. With all other things being equivalent, a faster-growing U.S. economy strengthens the dollar against the euro, and a faster-growing European Bloc economy strengthens the euro against the dollar. One key sign of the relative convincingness of the two economies is the level of interest rates. When U.S. interest rates are great than those of key European economies, the dollar generally strengthens. When eurozone amusement rates are higher, the dollar usually weakens.
Another factor that can receive a strong influence on the EUR/USD relationship is political instability among the members of the European Marriage. The euro currency is unique in that it is a common currency for 19 European states. As the countries within the eurozone learn to work with each other, contradistinctions sometimes arise. For example, results from the UK Referendum in 2016 to be off the European Economic Union and major elections in countries such as Germany, France, Greece, Italy, and Spain all have planned an impact on the direction of currencies. Other major events such as Switzerland’s decoupling from the euro peg also precipitates major changes to exchange rates. If these differences appear humourless or potentially threatening to the future stability of the eurozone, the dollar is likely to buttress against the euro. (For more, see: Healthiest And Safest European Economies)
Customer the EUR/USD
Because the EUR/USD represents currencies from the world’s two largest currencies from the in seventh heaven’s two of the largest economic and trading blocs, multinational corporations typically manage business in both the United States and Europe. These corporations clothed an almost constant need to hedge their exposure to the risk of currency progress. Some firms, such as international financial institutions, have helps in both the United States and Europe. These firms are also constantly affected in trading the EUR/USD. In 2016, the USD/EUR pair represented 23% of daily turnover. (For multifarious, see: What is hedging as it relates to forex trading?)
Because the EUR/USD is such a fashionable currency pair, arbitrage opportunities are not often available. However, investors soundless enjoy trading the pair. As the world’s most liquid currency yoke, the EUR/USD offers very low bid-ask spreads and constant liquidity for traders missing to buy or sell. These two features are important to speculators and help contribute to the team up’s popularity. Furthermore, the large number of market participants and the availability of fiscal and financial data allow traders to constantly formulate and reassess their way of thinkings and opinions. This constant activity provides for relatively high levels of volatility, which can command to opportunities for profit.
The combination of liquidity and volatility makes the euro/U.S. dollar in holy matrimony an excellent place to begin trading for newcomers to the currency market. Putting, it is always necessary to understand the role of risk management when selling currencies or any other kind of instruments. (For more information, see Forex: Readies Management Matters.)
From a technical analysis perspective, by taking a look at the five-year weekly sea-chart of the EUR/USD shown below, you can see that the Euro weakened relative to the U.S. dollar for much of 2014. The term of consolidation between 2015 and 2017 provided a technical base for the tandem and was the zone that was needed for traders to have the confidence to push the speed higher again. (For more on this topic, see: Currency Charts To Observant of)
Forex Currencies: The USD/JPY