The Relationship between EUR and USD

Live EURUSD Forex Chart

A brief history of the EURUSD

Despite EUR/USD being the most traded currency pair and consequently the most liquid currency pair, it has a relatively brief history. The euro was officially introduced as a currency on January 1st, 1999. The euro initially started only as an electronic currency, and only later in 2002 it started to officially circulate as paper money. However, we have to keep in mind that the Euro project dates back decades.

At first, only twelve EU nations adopted the Euro as their new national currency, but now it accounts for 19 out of the 28 member states of the European Union. Historically, Europe was one world’s largest trading regions, but that trade was complicated by fragmented currencies which lead to the introduction of the euro.

The introduction of the Euro currency is considered to be the most notable monetary reform in the modern history. The initial EURUSD exchange rate was 1.1795 but by the time it started circulating as a physical paper money in 2002, the EURUSD exchange rate fell to 0.8907, after initially having dropped to 0.8225 in 2000. The highest level reached by the EURUSD exchange rate was 1.6037 in July 2008, which was also the high prior to the subprime mortgage crisis.

Nowadays, the Euro is considered to be the second largest reserve currency after the US Dollar. The US Dollar alone makes up 85% of the total FX trading volume while the EURUSD currency pair accounts for roughly 30% of Forex market turnover.

EURUSD Trends and Technical Analysis

EUR/USD Monthly Chart

Since its introduction EUR/USD has been moving in a secular bullish trend that culminated with EURUSD almost doubling in value (87.68%) and reaching the all-time high at 1.6037. Since the euro was only introduced in 1999, before that date we have a synthetic exchange rate, which has been constructed using a weighted average of the previous currencies.

These big trends have strong fundamental drivers that put them in motion. On the one hand, we have the US Federal Reserve, which is also known as the world’s central bank, thus being the most important central bank around the world due to the dollar’s status of being the world’s reserve currency. On the other side, we have the ECB, which drives the euro monetary policy.

It’s important to note that the EUR/USD has had strong trends (bullish and bearish trends) that were only interrupted by short periods of consolidations. As a trading tip and a general rule, each period of consolidation is the starting point of either a new trend or a continuation of a previous trend.

How to identify a trend:

The simplest method to identify a trend is to look for the price to make higher highs followed by higher lows – bullish trend, and lower lows followed by lower highs – bearish trend. A better visual way to identify the trend is to use a simple moving average like the 200EMA which is regarded as the most powerful moving average. Normally, if we trade above the 200EMA we’re in an uptrend and conversely, if we trade below 200EMA we’re in a bearish trend.

EUR/USD Weekly Chart

EURUSD Trading Tips

When it comes to trading there are three ingredients for a perfect trade, but ideally, we would like to look for as many critical factors in our favor as possible. The three factors you should incorporate into your trading decision are:

  1. Fundamentals;
  2. Technicals;
  3. Sentiment;

The fundamental backdrop for the EUR/USD is what’s driving the volatility as well as the trade opportunity. The technicals can help us timing the market, while sentiment can help us determine how the other market participants are positioned in the market.

Best time to trade the EURUSD:

The best time to trade the EUR/USD is when the London session overlaps the New York session between 8:00 AM – 12:00 PM EST. Usually, this is the time the majority of all FX transactions happens and consequently, the market is prone to make big fluctuation thus is a great opportunity to make a profit.

Knowing when not to trade can be as important as knowing when to trade and EUR/USD becomes less tradable during the Asia session as the majority of trading activity is chasing away.

Trade during the London and New York session open:

The big financial centers like the London session opening and New York session opening can be the source of great trading opportunities. Usually, the FX dealers execute big orders during the first minutes of the open, which is why we see volatility suddenly increasing during that time.

EUR/USD 1H Chart

Use seasonal patterns:

The EUR/USD seasonal pattern is a great way to establish a market bias. The markets are governed by cycles and this for sure can add be an extra factor to consider before pulling the trigger on a trade. This seasonal pattern will only give you the EUR/USD tendencies to rise or fall at a certain point in time.

EUR/USD Seasonal Cycle

We can note that EUR/USD has the tendency to top in May and October while it tends to find a bottom in July, September, and November. This alone is a great deal of information as it can keep us on the right side of the market.