EUR/USD TRADING BASICS:

Mar 11, 2021 11:00 AM +01:00Martin Essex, MSTA, Analyst

According to the Bank for International Settlement (BIS), which compiles statistics in cooperation with world central
banks to inform analysis of global liquidity, among other things, the US Dollar and the Euro are the two most traded
currencies in the world. And EUR/USD is the most traded pair. It is important to note that the BIS is a good resource to
gauge the size of the $6.6 trillion global interbank market, but that non-institutional, or retail and/or individual investors,
do not engage in trading directly in the interbank market. Instead retail investors engage in trading with a Registered
Foreign Exchange Dealer, which acts as a counterparty to all of its customers’ trades.

EUR/USD TRADING BASICS:

• The US Dollar (USD) is the world’s dominant currency and the Euro (EUR) is the second most-traded.
• As a result, business in EUR/USD accounts for almost a quarter of trading in global foreign exchange markets
according to the BIS triennial report, which covers institutional trading.
• EUR/USD is a highly liquid pair.

WHAT IS EUR/USD?
Once every three years the Bank for International Settlements (BIS), often called the central bankers’ bank, conducts an
in-depth survey of the global foreign exchange (FX) and over-the-counter (OTC) derivatives markets. The most recent
look was in April 2019 and it emphasized again just how important the US Dollar and the Euro are in the currency
markets.
It calculated that the US Dollar was on one side of 88% of all trades, with the Euro in second place at 32%. Trading in
EUR/USD accounted for almost a quarter of all FX trades, according to the BIS survey.

FX MARKET TURNOVER (APRIL 2019 IN PINK VS APRIL 2016 IN BLUE)

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Source: BIS (You can click for a larger image); EME = Emerging Market Economies
WHERE TO TRADE EUR/USD
Because trading in EUR/USD is such a high percentage of the total, the pair can be traded in any of the major currency
centers: the UK, the US, Hong Kong, Singapore and Japan, as well as smaller centers such as Australia. Of note:  in these
major centres, retail investors engage in trading with a Registered Foreign Exchange Dealer, which acts as a counterparty
to all of its customers’ trades.
The period between the close of US exchanges and before Asian markets open is typically the most reserved period for
trade during a standard day. In contrast, the crossover of European late afternoon and morning New York trading hours is
normally the most active.

WHO TRADES EUR/USD?

The depth and liquidity of the EUR/USD market allows for all classes of traders to be active, including central banks,
investment banks, commercial banks, fund managers, corporates, retail traders and many more. Some, like the
corporates, may be hedging their exposure, while others are investors and some act in a speculative capacity. For retail
traders in particular – individuals who trade FX part-time or full-time through a broker – it is particularly attractive
because spreads can be tight, meaning the cost of buying and selling can be held low.

TIPS FOR TRADING EUR/USD USING FUNDAMENTAL ANALYSIS

It may seem obvious but, as with any currency pair, it is crucial to pay attention to both sides of the equation. In the case
of EUR/USD, it is important to monitor what is happening in both the US and the Eurozone – those EU countries that
have adopted the Euro as their currency.
It is therefore affected by economic data on both sides of the Atlantic, by Federal Reserve and European Central Bank
(ECB) decisions, by US and European governments’ actions, by political developments, by the spread between
government bond yields in the US and Germany – the Eurozone’s largest economy – and numerous other relative factors.
Note, for example, that when the ECB eased monetary policy in June 2014 by introducing the first in a series of so-
called targeted longer-term refinancing operations, or TLTROs, and cut its deposit rate below zero, EUR/USD found
itself in a prolonged period of weakness that lasted until March the following year.

EUR/USD PRICE CHART, WEEKLY TIMEFRAME (AUGUST 26, 2013 – MARCH 11, 2021)

Source: IG (You can click for a larger image)

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Moreover, EUR/USD is a good barometer of general market sentiment. The US Dollar is widely seen as the safest of
safe havens for investors looking to reduce their risk, so EUR/USD tends to fall when traders are pessimistic and rise
when they are more willing to look at riskier assets, even though the Euro is by no means the riskiest.

TIPS FOR TECHNICAL TRADERS IN EUR/USD

Because turnover is so high in EUR/USD, technical strategies tend to work well. As with other currency pairs and
crosses, some traders will use one of the many technical techniques in isolation while others will combine fundamental
and technical analysis, perhaps using the former to decide on a strategy and the latter to determine entry and exit points.
Note in the chart below, for example, that when the 14-day relative strength indicator (RSI) gave an “overbought” signal
in early March 2020 there was a swift move lower and that when resistance from a trendline that marked the upper limit
of a downward sloping channel was broken in mid-July 2020, there was an immediate move higher. This is only an
example and past performance is not indicative of future returns.

EUR/USD PRICE CHART, DAILY TIMEFRAME (JULY 30, 2018 – OCTOBER 21, 2020)

Source: IG (You can click for a larger image)

ADVANCED TIPS AND GENERAL STRATEGIES

To summarize, the breadth and depth of the EUR/USD market makes it unique and perhaps an appealing terrain for retail
traders just starting out – as well as those with years of experience. It may not be as volatile as many other markets but
volume will be substantial enough for traders to navigate in and out of trades.
As well as fundamental and technical analysis, psychological techniques deserve consideration in any strategy. From
gauging the mood of the general market in a spectrum between panic and mania to calculating personal risk
management, this can often present the most crucial insight for analysis and strategy development.
There is also plenty of positioning data to monitor. The US Commodity Futures Trading Commission’s weekly
Commitments of Traders (COT) reports on the major futures market participants offer insight for those with frequently
longer duration intention.

--- Written by Martin Essex, Analyst