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The EUR/USD exchange rate, which is €/$ for short and Euro to Dollar in full, is the currency amount in USA dollars that equals one Euro. In other words, it is a financial market protocol for quoting a specific time exchange rate between the currencies in question — USD and Euro.
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Here in this guide, we will try to explain to you some of the significant factors that impact the EUR/USD rate and currency risks. We will also try to provide an overview of what speculators and investors need to know in this regard.
So, to start with, the EUR/USD currency pair is the most traded in the forex market. The duo takes almost half of the daily market trade, which makes it an incredible pair. It’s a combination of the top two most-traded currencies in the world.
The pair is very liquid as most brokers provide a low spread, and for traders, it offers profitability with a plethora of favorable opportunities per day.
The EUR/USD pair, also known as the Euro and Fiber, has appeared to have low risks.
The currency must have got its name from the GBP/USD pair called the cable. Now that the traders made an upgrade from the old telecommunications cable to new fiber cable, the name had to change.
But what are the key factors that affect the EUR/USD pair in the forex market?
Trading Sessions
The trading session affects the pair significantly. Generally, forex trading is a 24-hour affair across the globe.
However, there’re little breaks that are significant to affect the pair. For instance, when the European market closes, market liquidity is affected.
Traders have to understand when to expect high volatility and the times when the pair is likely not to be traded.
During the Asian sessions, the trading is light as the economic data as well as other significant events get online during the US and European sessions.
Political Factors
Political events also affect the direction of the trading pair. Any political instability in a market will create uncertainty, and hence traders being uncertain of the outcomes, they trade less. In return, the daily volume for the pair goes down.
For instance, BREXIT caused a ruffle; therefore, any crisis or elections happening in the European countries affect volatility.
Interest Rates
The interest rates form the core of the economic activities, and the forex market is merely the consequence of the happenings in the economies.
Therefore, interest rates are crucial because they help determine spending levels as well as levels of investment.
Factors such as the GDP and inflation are directly affected by the interest rates in any given economy. For that reason, they also affect the exchange rate indirectly.
Financial Institutions
Another factor at the core of the economic activities is the influence of financial institutions or personalities.
Major Banks in Europe and the US determine monetary policies in respective economies, meaning heads of institutions do have a massive impact on the happenings in the market.
An announcement from the head of the Federal Reserve Bank or European Central Bank results in significant changes in the direction of the EUR/USD pair.
Economic Reports
Reports about an economy are made each year, and the events preceding and succeeding the time of the economic reports result in the excitement in the forex markets. This excitement can then affect levels of investment as well as trade.
As far as the annual reports are crucial for traders, the weekly and monthly reports are equally essential. Useful reports boost investor’s confidence while the adverse reports bring investment down.
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Conclusion
Collectively, the EUR/USD pair is the most traded in the forex market as it incorporates the two major economies.
To trade the pair successfully, a lot of factors need to be understood, such as the trading sessions, the influence of personalities or institutions, and the economic reports, among others.
