EUR/USD performance: A case for the currency pair's primacy

Author: Forex Live | Category: Education

An overview of the EUR/USD pair

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EUR/USD is one of the topmost forex currencies being traded today. While the USD has been long established, the Euro is the crystallisation of the economic aspects of the union of European states. Despite formidable crises since 2008, the Euro has stood its ground. The currency of the EU is not going to dissolve as long as the European project stays afloat. EUR/USD performance is going to remain a given in International economics. Also, the forex pair will continue rewarding study.

USD: A History of Dominance

The USD, in its current form, was brought into being as a consequence of the founding of the Federal Reserve Bank in 1914. US dollar-denominated bonds facilitated the fall of the gold standard as the basis of the world's currency. The latter position belonged to the British Pound, which was supplanted by the USD following the tremendous strains of WW 1. As per the Bretton Woods Agreement of 1944, the world's central banks linked their national currencies to the USD, effectively making it the world's reserve currency. Also, confidence was kept buoyant by US gold reserves. Large chunks of bank reserves worldwide, as also debt, is denominated in US dollars. The US financial markets are dominant to such agree that such influence is not unwarranted. US Treasury securities represent the most secure store of money. On account of the sheer size and strength of its economy, the USD wields enormous clout. The rest of the world needed little persuading to render their acceptance of USD as a legitimate tender.

The Euro

The Euro was 'born' on January 1, 1999. The predecessors of the new currency had not been true currencies. The European Unit of Account, and the European currency unit (ECU) were actually currency baskets that aided stability. The ECU was crucial in the history of the Euro. The degree to which this is true is borne out by the fact of 1 ECU being the value of 1 Euro on January 1, 1999. After this date, the major European currencies no longer had separate historical FX rates. The USD EUR exchange rate amounted in the earliest days to 1.1686.

Factors Impacting EUR/USD Pair

In common with other forex pairs, the EUR/USD pair has had to react to a number of factors. The most critical factors include the underlying economy's vitality and the concerned central bank's monetary policy.

The Role of Central Banks

Central bank response to crises is key in moulding market perception of the concerned national currency. For instance, the reaction of the respective central banks to the 2008 financial crisis was markedly dissimilar.

The US Fed met the crisis with the release of stimulus in several quantitative tranches of easing. The European Central Bank (ECB) gave a delayed response.

In those days of EUR/USD trading, the Fed stimulus, in conjunction with the sovereign debt crisis plaguing the Eurozone, played a pivotal role. Even back in 2008, there was speculation as to if one monetary policy would iron out Eurozone members' differences.

Predicting the performance of the pair is facilitated first of all by Fed forecasting. The better your understanding of the US Fed is, the better would be your appreciation of the EUR/USD pair.  Post-2008, the US Fed has demonstrably been generous in sharing the metrics impacting upon monetary policy. A key resource in this regard is the monthly employment situation report. Non-farm payroll (NFP) data has had a critical correlation to American GDP. Hence its significance in predictions.

The monetary policy is effectively directly proportional to the strength of the payroll report. A bleak report leads to the loosening of policy, while a confident report translates as policy tightening. The latter implies greater Dollar deposit returns.

Other Factors

However, predicting forex pair behaviour is predicated upon many factors. Traders must employ complex means in order to have a reliable set of trading strategies.

Average True Range & Volatility

One instance of how all this plays out is when non-farm payroll reports are released. Energetic price movements immediately follow this. In other words, watching the Average True Range gives you a good measure of how you should tackle volatility to rake in profits.

Is The EUR/USD Pair Stable?

Despite a persistent trade deficit that's become a feature of the US economy, the USD's role as the world's reserve currency has permitted stability in the EUR/USD pair. ROInvesting has a trading platform that will make forex trading safer for you.

Making sense of the economic and political conditions prevailing in the 27 EU member states is difficult. It is rewarding to keep abreast of happenings inside the bigger EU members. As these release data throughout the day, the value of the Euro is influenced several times daily.

Between 2008 and 218, the forex rate ranged between 1.039 and 1.598. From a near equal exchange rate (1:1), there was a change to the tune of $1.60.

The Euro side of the EUR/USD pair exchange rate is predicated upon:

  • Eurozone member states;
  • ECB monetary policy;
  • Job creation and employment rates;
  • Growth in Eurozone member states;
  • National debt, trade deficits in Eurozone;
  • World and domestic politics.

The US Dollar side of the EUR/USD pair exchange rate depends upon:

  • US GDP growth rates;
  • Fed interest rates;
  • Fed-set money supply;
  • Unemployment rates;
  • Social security;
  • Consumer savings;
  • National debt and trade deficits.

The Mechanics of EUR/USD Performance In Light Of Volatility

One pip, or percentage in points, is a measure of change that reflects variations in the relations between members of the currency pair. With respect to the EUR/USD pair, when the change is from 1.1703 to 1.1704, there's one point/pip movement.

In order to understand EUR/USD performance, the charts can be read with the following parameters:

  • Dealing;
  • Margin.

Dealing involves the following:

  • Minimum size (1),
  • Contract size (EUR 100,000),
  • 1 pip (0.0001 USD/EUR),
  • Value of One Pip (USD 10),
  • Margin (0.5%),
  • Minimum stop distance (3),
  • Minimum guaranteed stop distance (5).

Generally, the following template is followed in evaluating margin in terms of tiers:

  • Tier 1, Position Size 0 -11.5 Contracts, Margin 0.5% ;
  • Tier 2 , Position Size 11.5 -115 Contracts, Margin 1%;
  • Tier 3,  Position Size 115-172.5 Contracts,  3% ;
  • Tier 4, Position Size 172.5 Contracts, Margin 15%.

As we are already aware, there are a number of factors impacting how EUR/USD performance is played out daily. Additionally, a global pandemic that refuses to go away, combined with a new Presidency, have made evaluations more complex.

In Trend EUR/USD Performance

As per latest reports, the USD is climbing, with a bearish market. The EUR/USD has not been able to break $1.20 to the upside. Whether there will be a definite break below $1.185 any time soon is a moot question.

Will USD Go Up In 2021?

As per key sources, 2021 is set to be a year of the rise and rise of the USD. Economic recovery is underway. The USD is anticipated to appreciate to the tune of 1.15 against the Euro by the end of the year. An upside for the USD can actually arrive in a few months from now. The Fed and the ECB have different approaches to similar challenges facing them.

The easy policy posture of the Fed is ebbing away. While there's no danger of early tightening, policy normalisation is expected within a year. The ECB is looking towards progressive easing.

Stimulus as Catalyst in Policy Administration

Unfettered by the absence of Republican support, the new administration seeks to reinvigorate the American economy by its $1.9 trillion stimulus package. Through the interplay between the Fed's normalisation of monetary policy with such a considerable fiscal relief package, the USD is, in the end, expected to emerge stronger. ECB policy may tighten earlier.

Wall Street consensus estimates put US growth at 4.1% in the current year and 3.5% the following year. Another generous reckoning puts the consecutive growth estimates at 6% and 4.5%, respectively.

US inflation is predicted to arrive above price growth in the EU.

As the rates markets factor in policy normalisation, US -EU disengagement would lend support to the USD.

Dollar Shorts

Despite the USD's rally in the news, the market keeps on shorting the USD.

Conditional upon the US economy outperforming the EU, EUR/USD trade selling would strengthen the USD by cutting into long positions.

Risk Asset Positioning

Well, before policy support reaches its limit in the following quarter, risk asset positioning will likely peak in the first quarter.

The year has started at record high assets, which leaves little scope for more upside. The relatively long way to normalisation of the pandemic situation will be another factor upon which USD propping up will be predicated.

Conclusion

Given the US focus on reasserting their primacy in world affairs, Fed and governmental policies will synergise rather than allow conflict. The signs so far give a picture of robust growth. EU fundamentals being strong, the Euro is going to provide competent balance vis a vis the USD. Of the 19 Eurozone members, a few notables wield enough fundamentals to posit a counterweight to the US Fed. A ROInvesting demo account can let you habituate yourself to the highs and lows of forex trading. After this simulation experience, you can assess EUR/USD performance yourself with a live account.

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