Why is EURUSD suitable for retail traders of all levels of experience?
The current intense sell-off of the euro which traders are experiencing today is expected to lead to the euro reaching parity against the U.S. Dollar in the near future. What makes EURUSD to be the most traded and popular pair among traders, and what traders should watch out for when trading EURUSD?
The euro fell to a 20-year low against the U.S. dollar in early July and traders are starting to speculate about potential scenarios. Big banks are telling their clients to short the euro, and Bloomberg even claims that there is about a 50% of implied probability that the euro will reach parity with the U.S. dollar in the next month. Some analysts even consider the euro a currency that is virtually impossible to buy today because the ECB has no clear plans to fight inflation.
Such announcements are, of course, unlikely, but the truth is that ECB representatives are divided on how to proceed with the interest rate hike, while Europe faces a severe risk of recession due to a possible disruption of gas supplies by Russia. Naturally, a possible economic slowdown will limit the ECB’s options for raising interest rates, but the Central Bank’s dovish attitude will, on the other hand, widen the interest rate differential between the euro and the U.S. dollar even further, which in turn will put the European currency at a disadvantage against the U.S. dollar. If you add to all this the widened spreads on Italian bonds, it will look like a “perfect storm” on the euro today.
A pause in interest rate hikes by the U.S. central bank or an end to the conflict in Ukraine would nowadays help the euro the most. However, both scenarios are relatively unlikely today. So traders need to prepare for the possibility that declines like the one witnessed on the 5th of July may not be an exception, especially if the euro falls below parity (i.e., below 1.0000) against the U.S. dollar.
Higher volatility is no exception
Although today’s situation may seem exceptional and the volatility in EURUSD too high, significant movements are nothing out of the ordinary for this pair. For example, when in 2008 Lehman Brothers collapsed in the US and the financial crisis struck the world economy, the euro’s value broke the 1.6000 mark against the U.S. dollar. Then in 2010, when Greece ran into debt problems, EURUSD fell to 1.2300. In 2014 and 2015, the EURUSD currency pair dropped even more sharply than today, dropping from 1.3800 to below 1.0500, and even then there was a talk of the potential parity. At that time, the European situation forced the ECB to cut interest rates while the U.S. central bank was about to tighten the monetary policy.
The most traded pair
In short, EURUSD is one of the most traded currency pairs in Forex (it accounts for almost a quarter of all Forex trades) because it is affected by the economic events from the two most economically developed regions and contains the two most-traded currencies. Moreover, the largest global companies operate in both regions, so there is a massive amount of trading on these two currencies, and on the EURUSD pair itself, on a daily basis.
The U.S. dollar itself is the most traded currency (it appears in more than 80% of Forex trades). It has long been considered a reserve currency, it has a long history, it is the currency of most international transactions, and it is the currency in which most commodities are traded. In addition, it is considered to be a safe-haven currency that investors buy in times of uncertainty. Although the euro is a relatively young currency (it was only introduced in 1999), it is still the second most traded currency (it accounts for more than 30% of all Forex trades). It is the official currency in 19 of the 27 member states of the European Union and is considered the world’s second reserve currency.
High liquidity, low spreads
The advantage of high liquidity in EURUSD is that it can be traded at virtually any time of the day. The most active period for trading is at the end of the European trading session and the beginning of the North American trading session, but this pair can be traded at other times as well since this pair is traded in all major Forex trading centres in the world. All groups of traders have been involved in trading the EURUSD pair, from central banks to large institutional investors to retail traders. This leads to high liquidity and low spreads.
High liquidity and low spreads are an advantage for intraday traders or scalpers (it is also suitable for novice traders) and the technical analysis for this pair works very well on virtually any timeframe. As a result, traders trading this pair rarely experience significant market gaps as well as spread widening which happens rarely and for a short period of time during the release of major news announcements.
As can be seen from the first paragraphs of the article, the movements on the EURUSD currency pair are affected by the economic events in the US and North America as well as Europe. The ECB and Fed’s interest rates, unemployment and inflation in the US, Germany, and the whole Eurozone, as well as political developments on both sides of the Atlantic, all have an impact on the EURUSD currency pair. However, given the safe-haven status of the U.S. dollar, the geopolitical events in other parts of the world, or developments in the commodity, bond and equity markets, also have an impact on the pair.
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