There are many currency pairs in forex trading. Most of them have unique characteristics that are best learned through practice rather than reading, but fortunately, the duration of the learning process can be reduced by dividing the pairs into categories based on factors such as the interest rate of central banks, or the current account statistics. But among all these groups, there’s one pair the importance of which rises above every other one, and which defies classification and grouping. That is the EUR/USD pair.
The importance of this pair is mostly the result of its status as the barometer of market sentiment. The U.S. dollar is of course the world’s most important currency by a large margin. The Euro, on the other hand, is a highly credible and prestigious currency, in spite of the young age of the ECB, and the somewhat exaggerated political problems of the European Union. With its sophisticated financial system, strong economic base, and large but stagnant population, many traders regard the European Union as a credible alternative to the hegemony of the U.S. over the global economy, and its currency is therefore regarded as a potential replacement for the U.S. dollar. Such a major shift in the global financial system is unlikely to occur any time soon, and if it indeed did occur, it would be the result of a protracted process. As such, the USD losing its status as the world’s currency is unlikely. However, traders use the EUR/USD to express their opinion on the stability of the U.S. economically and politically, which makes this currency pair the most important measure of volatility and risk perception in the market due to the important role of the American economy in the world.
The EUR/USD pair can be influenced by almost any event in any part of the world in the short term, depending on the mood of the market. For example, a terrorist attack in the Nigerian Delta can lead to a rise in the EURUSD, as oil prices rise, the dollar gets sold, and oil exporters and others diversify into the Euro. But in general, short-term events have a temporary effect, and cannot be taken to signal trend changes in the absence of long-term confirmation.
In the long term, the main determinant of the value of this pair is the dynamism of the world economy. In general, if the U.S. is exporting dollars for consumption, and importing from the rest of the world while running a trade deficit, some of the dollars accumulated by other nations get sold for investment and higher yield, resulting in a rise in the EUR/USD. This supply and demand balance is influenced by the U.S. Federal Reserve interest rate policies in most basic terms, but many other factors, such as the carry trade, and the global growth of trade, all influence the equation determining the value of the EUR/USD pair.
The EUR/USD pair is the most popular pair for traders, and it is thus the most liquid which results in lower volatility, and a relatively tamer experience for beginning traders. Those who are new to trading, and are just considering forex brokers for opening an account can keep this in mind, and begin their trading in this pair in order to reduce volatility, and the resultant emotional pressures of trading. Professionals like this pair for its liquid nature, and its popularity with option traders, and large actors like central banks, hedge funds, banks, and many others.
