What is EUR/USD?
The EUR/USD currency pair represents the exchange rate between the euro and the US dollar, or the number of US dollars (the quote currency) needed to purchase one euro (the base currency). The pair comprises the two most actively traded major reserve currencies from the world's largest economies, making it the most liquid pair in foreign exchange.
The US dollar is the most traded currency in the world, held by most central banks and investment institutions, and used as the official currency in several countries, including Ecuador and El Salvador. Due to the stability and dependability of the US economy, the dollar is the currency of choice for international transactions and reserves. In addition, the dollar's dominance in international trade has significant implications for exchange rates and economic policies worldwide, and it can serve as a benchmark for nations that choose to set or peg their currencies to the dollar's value.
The euro is the official currency of the eurozone, which consists of nineteen of the 27 European Union member states. It launched digitally in 1999 and became a tangible currency in 2002. The European Central Bank (ECB) supervises its administration, and it functions as an international reserve currency and medium of exchange.
The EURUSD is a relatively new pair, as the euro was just recently adopted, and is referred to as "Fibre" in the financial community as an update to the name "Cable" given to the long-standing significant pair GBPUSD, whose basis currency is the British pound. Its value varied throughout the global financial crisis between an all-time low of 0.82 in October 2000 and an all-time high of 1.60 in July 2008.
EUR/USD historical performance
The euro rapidly established itself as a reserve currency and was the second most important currency in the world after the US dollar. The EUR/USD exchange rate rose consistently from 2000 to 2008, until the onset of a global recession.
The euro's recovery was short-lived as investors' confidence was shaken by the European debt crisis, resulting in a multi-year decline against the US dollar. The European Central Bank was compelled to reduce interest rates to zero, where they stayed until 2022.
What affects the price of the EUR/USD pair?
As evidenced by the appreciation of the euro during the 2008 financial crisis, the price of the pair reflects the relative strength of each economy. After 2008, the strengthening economy of the United States attracted global investors seeking predictable returns or safety, resulting in a high demand for dollars. Even though both currencies are regarded as safe-haven assets, people tend to flock to the US dollar during periods of economic uncertainty, causing its value to rise.
In addition to political events and geopolitical crises, the economic performance of the Eurozone is a significant determinant of euro pricing. Elections, policy shifts, Brexit-related developments, tensions between EU member states, and concerns about the Eurozone's future all have the potential to influence euro market sentiment.
Another element that affects the relative value of the currencies is the trade balance between the two regions. A trade surplus in one region can lead to currency appreciation, while a trade deficit can lead to currency depreciation. This relationship is particularly significant for the United States and the European Union. The two economies, which account for close to one-third of world GDP in terms of purchasing power, have the largest and most integrated bilateral trade and investment relationship in the world, encompassing one-third of global trade in goods and services.
The price of the pair is also affected by the disparity between the interest rates announced by the European Central Bank (ECB) once a month and the Federal Reserve eight times a year. Investors are attracted to countries with higher interest rates, resulting in a rise in demand for the country's currency and a consequent appreciation of its value. In contrast, reduced interest rates can decrease demand for a currency, resulting in its depreciation.
The release of significant employment figures for each respective region is another factor that affects the price of the EURUSD pair. These numbers, such as non-farm payrolls in the United States and unemployment rates in the Eurozone, provide insight into the health and stability of the respective economies. Positive employment data can bolster investor confidence and contribute to a rise in currency demand, thereby increasing the currency's value relative to its counterpart.
What to watch out for when trading EUR/USD?
Keep a watch on data releases and statements from influential organisations in the United States, Eurozone, European Union, and individual member countries (especially Germany and France, Europe's two largest economies) when trading EURUSD.
- European Central Bank (ECB) Interest Rate decision
- US Federal Reserve Interest Rate decision
- US and eurozone Consumer Price Index (CPI) inflation numbers
- US and eurozone GDP figures
- Unemployment statistics for the US and the eurozone
- US and eurozone Manufacturing and Services PMI
- US and eurozone Consumer sentiment
- Economic data for major eurozone countries (Germany, France, Italy, and Spain)