Highest Traded Currency Pair: EUR/USD | Why it is the Best Currency Pair to trade?
What is the Highest Traded Currency Pair?
The EUR/USD is considered as the highest traded currency pair in Forex Market. EUR/USD currency pair is the largest in the world, with high liquidity. It is also an unregulated currency in the Forex market. This pair alone brings in about $4 billion daily. And now, since anyone with a computer with an internet connection can trade currencies on the Forex market, the EUR/USD currency pair is only gaining in popularity. Casual traders want the biggest ROI and when they trade the EUR/USD currency pair, it is their best bet at succeeding.
Only a few countries around the world has bigger economic power. The United States and the European Union are the two largest economic powers in the world. The U.S. dollar is both the world’s most heavily traded and most widely held currency. The currency of the European Union, the euro, is the world’s second most popular currency. And since it contains the two most popular currencies in the world, the EUR/USD pair is forex’s most actively traded currency pair.
Why most traders like to trade with EUR/USD?
Most of the traders prefer to trade with EUR/USD currency pair. Whether you’re a beginner to Forex or simply dabbling into trading EUR/USD for the first time, there are some things you’re going to need to know about the most popular & highest traded currency pair in the Forex market.
The Euro and the United States dollar both originate from the world’s two largest economies. This pair has been traded since 1999 and, while generally stable, has also undergone some fairly major fluctuations. EUR/USD is often touted as being the highest traded currency pair & best for beginner traders, as it is one of the easiest to analyze and comes with a wealth of trading information and historical analysis.
Forex traders love this pair because of numerous reasons. As the world’s most liquid currency pair, the euro/U.S. dollar offers very low bid-ask spreads and constant liquidity for traders wanting to buy or sell. These two features are very important to speculators and have helped contribute to the pair’s popularity. In addition, the large number of market participants and the non-stop availability of economic and financial data allow traders to constantly formulate and re-examine their positions and opinions on the pair. This constant activity provides for relatively high levels of volatility, which can lead to opportunities for profit.
The facts to consider while trading EUR/USD
There are some important facts we need to consider before trading on EUR/USD. In general, the easiest way to track the EUR/USD pair is actually by tracking the general health of the US Dollar, because it is one country as opposed to nearly 30. When the Federal Reserve takes actions that improve the overall strength of the dollar, it will be going up in relation to the Euro. Thus most of the primary influences on EUR/USD are also going to be on USD as a whole, and many of the other types of currency pair will be mirroring the performance or following it.
The U.S. Dollar facts
It is obvious that the U.S.Ddefinitely plays an important role in the world’s economy and finance. As the world’s generally accepted reserve currency, the U.S.D is used to settle most international transactions. When global central banks hold foreign currency reserves, a large fraction of those reserves are often held in U.S. dollars. Also, many smaller countries choose either to peg their currency’s value to that of the U.S. dollar or just completely forgo having their own currency, choosing to use the U.S. dollar instead. Additionally, the price of gold (and many other commodities) is generally set in U.S. dollars. Not only this, but the Organization of Petroleum Exporting Countries (OPEC) transacts in, you guessed it, U.S. dollars. This means that when a country buys or sells oil, it buys or sells the U.S. dollar at the same time. All of these factors contribute to the dollar’s status as the world’s most important currency.
As a result thatUSD is the most heavily traded currency in the world, most foreign currencies trade against the U.S. dollar more often than in a pair with any other currency. For this reason, it is important for traders starting out in the currency markets to have a firm grasp of the fundamentals that drive United States economy to gain a solid understanding of the direction in which the U.S. dollar is going.
The EURO Facts
The euro is not a currency of a single country, rather it is the single currency of 28 European countries within the European Union, collectively known as the “Eurozone” or the European and Economic Monetary Union (EMU). Disagreements arise from time to time among European governments about the future course of the European Union or monetary policy and when these political or economic disagreements arise, the euro can be expected to weaken.
Overall, the European Union represents the world’s largest economic region with a GDP of more than $13 trillion. Much like the United States, the economy of Europe is heavily focused on services, manufacturing, however, represents a greater percentage of GDP in Europe than it does in the United States. When economic activity in the European Union is strong, the euro generally strengthens; when economic activity slows, as expected, the euro should weaken.
The list below shows the current members of the Eurozone as of June 27, 2016. When trading the euro/U.S. dollar pair, investors should carefully watch for troublesome economic and political news originating in these countries. If several Eurozone countries have weakening economies, or if newspaper headlines are discussing political difficulties among the countries in the region, the euro is likely to weaken against the dollar.
Members of the European Union
- Czech Republic
Benefits of trading with EUR/USD
Why EUR/USD is the highest traded currency pair? As we said earlier that there are numerous reason why traders prefer to trade on this pair. Here are some important facts being disclosed:
While trading with EUR/USD, Traders can enjoy high liquidity of the instrument, which determines the favorable conditions of conclusion of transactions. In addition, due to the liquidity, Euro/dollar pair is one of the most predictable currency pairs of Forex – price dynamics can be predicted using technical analysis indicators
Predictability of EUR/USD trend
One of the common benefits of trading with EUR/USD is predictability of EUR/USD trend. As noted above, the economy of the EU and the US are among the most transparent in the world.
Availability of liquid derivatives
Availability of liquid derivatives on EUR/USD is another fact that is largely influencing traders to trade on this particular currency pair. This allows investors to trade on the EUR/USD not only in the spot market, but also to use derivatives such as futures, options, CFDs.
Combination of liquidity and volatility
The combination of liquidity and volatility makes the euro/U.S. dollar pair an excellent place to begin trading for forex newcomers. However, keep in mind that it is always necessary to understand the role of risk management when trading currencies or any other kind of instruments.
Access to the largest financial market in the world
EURO and U.S. dollar are the world’s two largest currencies, representing the world’s two largest economic and trading blocs, as a matter of fact- many multinational corporations conduct business in both the United States and Europe. These corporations have an almost constant need to hedge their exchange rate risk. Some firms, such as international financial institutions, have offices in both the United States and Europe. Firms that fit this description are also constantly involved in trading the euro and the U.S. dollar.
Knowledge of exact income on in-the-money trades
EUR/USD can thus be considered one of the “safest” trades; it’s not prone to large fluctuations, but it still does increase and decrease over time.
Simple risk management
Many forex signals cover EUR/USD and are able to offer fairly consistent returns. This is because the European economy and the economy of the United States as a whole tend to either be stable or fluctuate in fairly easily anticipated intervals. The only exception is when there are sudden economic crashes, which do not occur often — and usually affect other traders rather than forex traders.
Forex Trading with EUR/USD
There are many opportunities available for those who have a true and in-depth understanding of this currency pair.
As the leading, most commonly traded & highest traded currency pair, EUR/USD leverages the powers of two exceptionally strong currencies in order to create a more stable and reliable trading relationship.
This widely highest traded currency pair still has many intricacies and is also affected by global economic conditions. So when working with EUR/USD trades, a reliable trading signal can reduce much of the worry associated with trading — a trading signal will give you the information that you need to complete a trade without necessarily having to do the legwork yourself.
Fundamental analysis is often used in lieu of technical analysis because the EUR/USD has such complicated driving factors. Fundamental analysis looks at the countries involved for unemployment rates, interest rates, and other economic factors; essentially it is looking at the fundamentals of the economy rather than analyzing the actual prices of each currency.
When it comes to currency exchange however; technical analysis is by far more popular. Nevertheless, good fundamental traders can often be very prolific when it comes to EUR/USD trading, because they can quickly identify any potential trading situations before they occur. For instance, a fundamental trader could see that unemployment is rising and could thus anticipate the issues that the currency will quickly be facing.
In terms of technical analysis, it’s often support and resistance factors that are most considered, because EUR/USD really doesn’t fluctuate too much; essentially, the trader can look at the lowest historical prices for the trading pair in recent memory and can trust that the pair will likely go up from there.
Likewise the analysis can look at the highest trading amount and trust that the trade will probably go down. Support and resistance trading trusts that the pair will remain within a certain spectrum for a certain amount of time, but the trader will need to trust themselves to identify these spectrums. And of course any other major method of technical analysis can be used for trading EUR/USD; it is the most common and popular of pairs, and thus there are many common and popular ways of analyzing it.
Another major factor that has a strong influence on the euro/U.S. dollar relationship is any political instability among the members of the European Union. The euro, introduced in 1999, is also relatively new compared to the world’s other major currencies. Many economists view the Eurozone as a test subject in economic and monetary policy. As the countries within the Eurozone learn to work with one another, differences sometimes arise. If these differences appear serious or potentially threatening to the future stability of the Eurozone, the dollar will almost certainly strengthen against the euro.
Of course, you’ll still need to have a focus on money management and develop your trading discipline; there’s no forex signal that can stop you from being an emotional or inconsistent trader! However, forex trading signals do allow you to tap into the experienced, educated minds of traders that have traded EUR/USD for many years — some of them since the inception of the currency pair way back in 1999.
EUR/USD quotes are sensitive to fundamental factors. In particular, Euro/dollar value depends on the monetary policy of the US Federal reserve and the European Central Bank, as well as from the difference in key interest rates by the FRS and the ECB. The overall economic situation in the US and the EU, statements of large corporations, dynamics of raw materials and commodity markets also affect the Euro/dollar pair trading. In addition, analysis of the most popular & highest traded currency pair, EUR/USD is impossible without taking into account geopolitical factors.
The primary issue that influences the direction of the EUR/U.S. dollar pair is the relative strength of the two economies. Holding all else equal, a faster-growing U.S. economy strengthens the dollar against the euro, and a faster-growing European Union economy strengthens the euro against the dollar. As previously discussed, one key sign of the relative strength of the two economies is the level of interest rates. When U.S.interest rates are higher than those of key European economies, the dollar generally strengthens. When Euro zone interest rates are higher, the dollar usually weakens. However, as we’ve already learned, interest rates alone cannot predict movements in currencies.
To know more about why EUR/USD is the highest traded currency pair, see this video: