EUR/USD TRADING GUIDE

Table of Contents
EUR/USD: Euro to US Dollar FX Trading Guide ................................................................................ 3

Disclaimer ........................................................................................................................................ 14

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EUR/USD TRADING GUIDE

EUR/USD: Euro to US Dollar FX Trading Guide

EUR/USD is an exchange rate reflecting the amount of US Dollars it costs to purchase 1 Euro. This
value fluctuates around the clock, and similar to trading stocks or commodities, provides traders
with an opportunity to speculate on whether the EUR/USD exchange rate will rise or fall. Retail
forex trading is different than trading other popular asset classes, however, due to a few unique
characteristics of the global currency market.

Key concepts of retail forex trading including forex liquidity and EUR/USD mechanics are discussed
in detail below. This EUR/USD trading guide is also organized to include more advanced topics such
as EUR/USD fundamental analysis, EUR/USD technical analysis, and other important considerations
when trading EUR/USD.

EUR/USD EXCHANGE RATE OVER TIME (CHART 1)

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EUR/USD TRADING GUIDE

This liquidity attribute applies to EUR/USD in particular seeing that it is the most popular and heavily
traded currency pair. The vast depth of EUR/USD liquidity can be advantageous for traders
because greater liquidity facilitates lower transaction costs as well as the ability to move in or out
of positions with ease. The overarching reason that EUR/USD is the most liquid currency pair
broadly follows the notional composition of FX reserves held by central banks around the world.

EURO, US DOLLAR REPRESENT ROUGHLY 80% OF GLOBAL FX RESERVES (CHART 2)

In fact, according to a recent report from the International Monetary Fund, the US Dollar and Euro
represent 61.3% and 20.3% of global FX reserves respectively. The US Dollar and Euro comprising
just over 80% of total FX reserves underscores the dominant liquidity conditions enjoyed by
EUR/USD relative to other major currency pairs. This generally stems from the United States and
European Union being the two largest economies in the world.

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EUR/USD PRICE VOLATILITY ELEVATED AROUND LONDON & NEW YORK SESSION OVERLAP
(CHART 3)

Speaking of EUR/USD liquidity conditions, the most active time of day to trade the Euro and US
Dollar is between 8:00-11:00 AM ET. This is judging by intraday realized EUR/USD volatility, which
is measured using the 15-minute average absolute value change in pips as shown in the chart
above. EUR/USD volatility is typically elevated during this time frame largely because it is when the
European and US trading sessions cross over from the London end-of-day fix to the New York
opening bell.

For example, EUR/USD price action on average swings up or down 6.5-pips every 15-minutes
during this time, but market volatility is usually less around the APAC open and US close with
EUR/USD changing about 2.5-pips every 15-minutes. That all said, what determines the direction
of EUR/USD price movements?

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EUR/USD TRADING GUIDE

EUR/USD HISTORICALLY FLUCTUATES WITH SOVEREIGN INTEREST RATE DIFFERENTIALS (CHART

4)

EUR/USD fundamentals broadly dictate the ebb and flow of spot prices. As with all foreign
exchange rates, changes in sovereign yields and domestic inflation expectations serve as two key
pillars of forex trading fundamentals. These two fundamental variables hinge predominantly on
economic growth prospects, which generally fluctuate in response to high-impact economic data
as well as shifts in fiscal and monetary policy.

A relatively higher yielding sovereign interest rate tends to put upward pressure on the domestic
currency, but an increase in future inflation expectations can erode the bullish tailwind. Better-
than-expected economic data can increase demand for domestic risk assets like stocks, which can
facilitate capital inflows and domestic currency strength. Strong economic data can also spark a
selloff in safe-haven assets such as sovereign bonds and push interest rates higher in turn.

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EUR/USD TRADING GUIDE

This brings to light the importance of keeping close tabs on macroeconomic developments,
including high-impact news flow, anticipated data release and scheduled event risk, which can
cause the dominant bullish or bearish fundamental narrative to oscillate. Market headlines that
might lead to material changes in a fundamental bias encompass those that weigh significantly on
trader risk appetite or prospects for domestic economic growth.

EUR/USD PRICE ACTION RESPONDING TO EURO RECOVERY FUND DEVELOPMENT (CHART 5)

A recent example that led to a seismic shift in the direction of EUR/USD price action due to an
altered fundamental landscape was when the European Union agreed to a joint debt offering to
the tune of 750-billion Euro in May 2020. This fiscal aid package not only provided needed support
to a coronavirus-battered Eurozone economy, it also reduced perceived risk stemming from a
potential breakup of the EU.

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EUR/USD TRADING GUIDE

Prior to this major fundamental news, the EUR/USD exchange rate was trading lower by 3% on a
year-to-date basis, but then subsequently surged 10% higher on the back of the development.
Commentary from key personnel such as important political leaders can have a significant impact
on EUR/USD price action as well. Another critical driver of EUR/USD fundamentals include market
reactions to central bank interest rate decisions in addition to forward guidance provided by
monetary policy decision makers.

EUR/USD RATES TEND TO BROADLY FOLLOW CHANGES IN ECONOMIC GROWTH TRAJECTORIES

(CHART 6)

Tracking the difference in monthly PMI readings between the Eurozone and United States can
serve as another ‘big picture’ approach to analyzing EUR/USD fundamentals. As illustrated in the
chart above, the Euro tends to strengthen against the Greenback when EU PMI data improves
relative to US PMI data. Similarly, the US Dollar typically strengthens against its bloc currency
counterpart when US PMI data improves relative to EU PMI data.

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EUR/USD TRADING GUIDE

This is because capital flows generally have a magnetic pull toward better prospects for future
economic growth and monthly PMI data stands out as a leading indicator of business activity. Once
again, capital inflows generally have a bullish impact on the domestic currency while capital
outflows typically have a bearish impact on the domestic currency.

It is also important to note that there are several other economic indicators that can cause a
sizeable impact on the direction of EUR/USD like monthly jobs data and consumer confidence
reports among others. That said, the influence of different economic data can vary depending on
the nature of the release and what the market is most concerned about at that point in time.

EUR/USD TECHNICAL ANALYSIS USING MOVING AVERAGES, SUPPORT AND RESISTANCE (CHART
7)

Analyzing EUR/USD price trends and patterns can provide forex traders with a different approach
to determining if the currency pair will strengthen or weaken going forward. Moreover, technical
analysis can be used in conjunction with fundamental analysis by helping traders identify strategic

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EUR/USD TRADING GUIDE

entry and exit points for potential trades. There are numerous methods and indicators to use when
conducting technical analysis, but support and resistance levels, in addition to moving averages,
serve as two primary building blocks.

Technical support and resistance levels can be identified in many different fashions and can make
their placement relatively subjective. As such, it could be prudent for traders to place greater focus
on key pivot points, which are defined more objectively. These potential inflection points are
determined by opening and closing levels in addition to swing highs and swing lows. Illustrated in
the daily EUR/USD chart above, we highlight the 2020 yearly opening level at the 1.1200-handle.
This level of prior resistance-turned support served as a big area of buoyancy for EUR/USD later in
the year.

At the same time, EUR/USD also formed a bullish golden crossover of its 50-day and 200-day
simple moving averages. A golden crossover occurs when the faster moving average surmounts
the slower moving average, and typically signals higher prices ahead. Conversely, a bearish death
cross, where the faster moving average dips below the slower moving average, typically sends an
ominous signal that selling pressure is likely to be sustained. The 50-day and 200-day moving
averages are two of the most commonly used periods, but moving averages can be utilized across
varying time frames. Furthermore, moving averages can be looked to as dynamic support and
resistance levels.

EUR/USD DAILY CANDLESTICKS WITH BOLLINGER BAND INDICATOR OVERLAID (CHART 8)

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EUR/USD TRADING GUIDE

Due to the vast liquidity of EUR/USD and the inherent mean-reverting characteristics of forex
trading, the use of Bollinger Bands as a technical indicator is one potential technical strategy for
determining where the currency pair might head next. A Bollinger Band can be overlaid on a
EUR/USD price chart to statistically reflect a one-standard deviation trading range, which is
typically calculated from its 20-period simple moving average. This means that the Bollinger Band
channel is mathematically expected to contain price action 68% of the time.

In other words, if spot price is trading below the bottom barrier of its Bollinger Band, this could
indicate that the EUR/USD exchange rate is undervalued and has a statistically strong probability
of reversing back higher toward its average. Conversely, if spot EUR/USD is trading above the top
barrier of its Bollinger Band, this could suggest that the currency pair is overvalued and has
potential to pull back lower. It is worth mentioning that this is a general approach to trading the
Bollinger Band technical indicator and several more advanced Bollinger Band trading strategies
exist.

An example of a more complex approach is incorporating the Bollinger Band Width indicator, which
helps traders determine whether volatility is expanding or contracting. Expanding Bollinger Band

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EUR/USD TRADING GUIDE

width strengthens the case for potential breakouts whereas contracting Bollinger Band width
points to the growing likelihood that price will consolidate.

EUR/USD PRICE TREND OFTEN MIRRORS CHANGES IN RETAIL TRADER POSITIONING (CHART 9)

Trader psychology and market sentiment play big roles in the direction of EUR/USD price
movements as well. One of the primary drivers of this concept is the US Dollar’s posturing as a top
safe-haven currency. This inherent characteristic, which largely follows the fact that the US Dollar
is the most liquid currency in the world, helps USD strengthen against other currencies during
episodes of trader risk aversion.

Analyzing changes in EUR/USD positioning can also help forex traders decipher where the spot
prices might trend next. Looking at EUR/USD trader data from IG, a global forex broker with a
significant chunk of market share, we can see that retail positioning tends to broadly mirror the
direction of EUR/USD. Due to the inherently strong inverse relationship between market direction

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EUR/USD TRADING GUIDE

and retail trader positioning, IG Client Sentiment Data can be incorporated as an additional step
within the framework of a comprehensive trading strategy.

EUR/USD TRADING GUIDE SUMMARY

• EUR/USD is the most liquid and heavily traded currency pair in the world

• EUR/USD price action is most active during the European and US trading session crossover

• Fluctuations in real yields (i.e. sovereign interest rates and inflation expectations) can
broadly strongarm the direction of EUR/USD

• A comprehensive approach that incorporates both fundamental and technical analysis can
help EUR/USD traders develop a robust trading strategy

• Developing a comprehensive trading strategy and following sound risk management

techniques are critically important

• Open a demo trading account with IG

• Additional trading resources

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We recommend that you seek independent advice and ensure you fully understand the risks involved before trading.

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EUR/USD TRADING GUIDE

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