Presentation of the EUR/USD:
To better understand movements in the EUR/USD currency exchange rate it is necessary to understand what this pair represents.
The EUR/USD, or Euro Dollar corresponds to the currency exchange rate for the Euro in American Dollars, to put it simply this pair expresses the value of one Euro in American Dollars. This currency pair can therefore be used in real time commercial trades relating to the economy, in foreign exchange transactions for international travel or as a financial tool with the aim of speculating on the Forex market.
It should be noted that the EUR/USD is actually, and has been for a long time, the most traded currency pair on the foreign exchange market. It is in fact highly popular with investors for various easily understandable reasons. We also know that the Euro Dollar currency pair is highly fluid and that the Euro and the dollar are the most used currencies in international trade. The volatility is however also highly significant and we therefore recommend prudence when this currency pair is used as a financial asset for trading.
Movements in the EUR/USD currency exchange rate are freely made according to the floating currencies system. These movements therefore take place according to the supply and demand on the interbank markets. It is the two central banks that are responsible for these currencies, the European Central Bank or ECB, for the Euro and the Fed, or American Federal Reserve for the dollar that are the only entities with the right to intervene in an exceptional manner to influence the movements of this rate.
The Euro Dollar currency pair is also the most spot traded currency pair worldwide as it represents nearly 33% of the dollar exchange transactions.
The technical analysis of the EUR/USD:
One of the types of analyses used by stock market investors on the Forex for trading in the Euro Dollar rate is the technical analysis which we shall examine here. In fact, this analysis uses the movements observed on the charts to identify the specific configurations that will indicate the formation, acceleration or reversal of a trend.
More precisely, a technical analysis of the EUR/USD currency pair uses various technical indicators. These are generally trend indicators but also volatility and fluidity indicators. Among the most commonly used technical indicators we note the following:
- The Fibonacci lines
- The pivot points
- The support and resistance levels
- The MACD indicator
- The moving averages
- The Bollinger Bands
Although it is possible to choose one or another of these indicators it is preferable to use several simultaneously to obtain confirmation of the signals obtained. However it is important to remember here that a technical analysis is not a guarantee and does not provide rising or falling indicators that are 100% reliable. In fact, this analysis is none other than a mathematical and statistical analysis that does not take into account the psychology of the markets and other exterior factors that are necessary to find and study through the completion of a fundamental analysis that we examine in detail later on.
Another important factor to take into account for your technical analysis of the EUR/USD currency exchange rate relates to the time period covered by the chart. In fact, the time units displayed on the Euro/Dollar chart can normally be personalised and vary between one minute and one year. Depending on the strategy adopted and its length, it may be necessary to adapt this display with the aim of studying the exchange rate movements over the short, medium or long term for this currency pair.
Last but not least it is also important to pay careful attention to the type of chart you use. Generally the EUR/USD charts available from the online brokers integrate the functions necessary for a technical analysis but this is not always the case. It is therefore important to check that the chart you choose enables the display of several indicators simultaneously and in real time and the personalisation of the type of display (curves, lines, Japanese candlesticks…) as well as the choice of timeline with the personalisation of time periods.
The calculations necessary to obtain the technical indicators do not need to be completed by you as these are generally completed automatically by software. You do however need to learn how to interpret these indicators correctly to be able to obtain pertinent trading signals.
Fundamental analysis of the EUR/USD:
Now that we have examined the technical analysis of the EUR/USD exchange rate we shall now look at another type of analysis that is essential for this currency pair. This is of course the fundamental analysis which, as we mentioned earlier, consists above all of an analysis of the exterior factors that could influence the supply and demand and therefore the exchange rate of this currency pair.
To understand this analysis it is important to remember that the Euro Dollar currency pair represents the currency exchange rate between the premier global economic power, the United States, and the Euro Zone which again is a strong economic power. As you no doubt understand, any economic events relating to these two currency zones will have a direct influence on the exchange rate of the EUR/USD currency pair on the foreign exchange market. However other indicators can also impact this rate. Here is a list of the major American and European publications and announcements that you should monitor in the course of this analysis.
- Firstly we would take a particular interest in the interest rates of the two economies, these are the rates used by the banks when financing companies and individuals. These interest rates are of course determined by the central banks which in this case are the Fed and the ECB.
- Generally speaking we would also assiduously follow any press conferences and meetings of the central banks of which the dates are stated on the economic calendar. These meetings and conferences often exert an influence on the rates of these two currencies.
- Among the most influential economic indicators regarding these two currency zones we find the non agricultural employment figures that take into account the employment rate and therefore the activity in each zone or country.
- Of course, the unemployment rate and the salary growth levels also represent pertinent data to examine as they influence the purchasing power and consumption and therefore the company sales.
- We would also follow the CPI inflation rate, the Consumer Price Index, which is directly correlated with the values of the Euro and the American Dollar.
- Other figures and economic results should also be monitored such as for example the growth rates of the GDP, or Gross Domestic Production, the retail sales, the orders for durable goods, and industrial orders, the sentiment of the companies as well as consumer confidence. There again the publications are announced in advance in the economic calendar.
- Of course, political and geopolitical events affecting these two global economic powers should also be taken into account when completing your fundamental analysis as a military or trade war will exert a significant influence on an economy and therefore its currency.
Of course, a fundamental analysis, as with the technical analysis, should not be used alone but rather as an accompaniment to the other analysis or even other analytical methods that we shall not examine at this time.