The EUR USD is the most important currency pair in the forex market. A Euro currency chart can be compared to a temperature measure; since it is seen by many as a possible alternative to the US currency as a store of value, and a medium of transactions at the international level, it usually responds strongly to market perceptions about the health and stability of the world economy.
An EURUSD chart must be examined carefully in each day to gauge the overall mood of the market. Although other currencies have their own dynamics and can sometimes establish trends that are, to some extent, independent of the general risk perception of the market, this is not very common, and traders can benefit from keeping the EURUSD exchange rate trade in mind while making any forex decision.
The Euro is the currency of the Eurozone. Although it is intended to replace all the national currencies of Europe in time, due to the lengthy convergence process, at the moment it has been adopted by Germany, France, the Netherlands, Belgium, Italy, Spain, Portugal, Slovenia, Slovakia, Cyprus, Malta, Luxembourg, Austria, Greece, Finland. It is also used in Bosnia, and some African nations as the de-facto national currency towards the purpose of creating better conditions for foreign investment through ‘borrowed’ monetary stability.
The currency is regulated by the European Central Bank (ECB), the policy mandate of which dictates that the central bank aim at low inflation as its main purpose in its decisions. The ECB is generally regarded as a hawkish institution, with a more strict approach to inflation in comparison to the U.K. or the U.S.
As part of a process initiated in the Maastricht Treaty of 1992, the Euro became the sole currency of the Eurozone on 1 January 1999, although national currencies continued to circulate until 2002. Today, it is the second most popular reserve currency in the world, with about a quarter of global central bank reserves denominated in Euros.
The U.S. currency is the main medium of international trade and finance. Apart from being the global currency, it is also the reserve currency of the world’s central banks, with about 65 percent of global forex reserves denominated in the currency.
The U.S. dollar was introduced as part of the independence process of the United States in 1792, and it was in circulation side-by-side with the Spanish dollar until 1857. As with all other currencies in the world, the dollar was based on a gold standard from its creation until the termination under the Nixon Administration.
Various complex financial events caused by the Great Depression led the British to devalue the pound, which in turn led President Roosevelt to devalue the dollar in for the first time since 1792. The Second World War further caused the British Empire’s economic clout to evaporate, leading to the emergence of the dollar as the system of the global financial system as officially recognized by the Bretton Woods agreements establishing the IMF, and the predecessor to the World Bank of today.
The Gold Standard was weakened due to increased internationalization of the financial world, with multinationals moving capital rapidly across borders, leading to imbalances that would not be reflected in the exchange rates due to political inflexibities, creating arbitrage opportunities for speculators. The tensions and political turmoil of the Nixon Era, massive speculation that exploited the perceived imbalances among national currencies which were not reflected on exchange rates, as well as reduced cooperation among nations at the international level finally led to the dropping of the gold standard in 1971.
Trends in the EURUSD pair
The pair is under the influence to major factors. One is the fundamental weakness of the U.S. economy, caused by the perceived softness of the U.S. Federal Reserve, and the large trade and budget deficits of the nation, as well as an increasing burden of debt which is thought to have the potential to become a serious problem for future generations. The other factor is the interest rate differential between the two central banks’ rates , and the resultant differences in the yield curve. In addition, the EURUSD rate is highly responsive to global risk perceptions. Since many traders borrow in the dollar to invest in the Euro, and also because many nations with dollar surpluses recycle their earnings to the European currency in order to diversify more effectively, the EURUSD quote will see increasing volatility at times of heightened risk sentiment. The Russians, Chinese, various oil-exporting nations from the Middle East are the main drivers of the currency reallocation effort, and their behavior often contributes to the determination of support and resistance levels.
Most recently, the currency market is focusing on the potential of the Euro to somehow supplant the dollar as the currency of world trade sometime during this decade.