EUR/USD is the most popular pair for Forex currency traders worldwide and with good reason. Trading Euro to US dollar (or vice versa) gives currency traders the opportunity to make use of the world’s two largest economies and to take advantage of the volatility and liquidity intrinsic to this pair. Reviewing the EUR/USD chart on a consistent basis gives a clear picture of market trends.
The U.S. Dollar
The United States and the US dollar have a special role in the currency markets, as it has long been accepted as a reserve currency and the currency of choice for international monetary transactions.
The U.S. dollar is the world's most heavily traded and most widely held currency. In fact, the United States is the largest national economy in the world, with a gross domestic product (GDP) of nearly $14 trillion. When economic activity in the United States is strong, the dollar strengthens and the EUR/USD exchange rate adjusts accordingly. When economic activity slows down, the dollar weakens. Because the United States is also considered a safe haven for assets of all kinds, the dollar tends to rise during times of political or global financial tumult.
The European Union represents the world's largest economic region with a GDP of more than $13 trillion. It follows that same pattern of responses to economic activity throughout the region as does the U.S. dollar. When economic activity in the European Union is strong, the euro strengthens; when economic activity slows, the euro will weaken. Despite the challenges that the region has experienced in recent years, or perhaps because of them, the currency remains a strong interest for currency traders worldwide.
A primary factor that influences the U.S. Dollar to Euro FX trading analysis is the relative strength of the two economies. One key sign of the relative strength of the two economies is the level of interest rates. When U.S. interest rates are higher than those of key European economies, the dollar generally strengthens. When eurozone interest rates are higher, the dollar weakens.
The EUR/USD chart will show another strong influence on the euro-dollar relationship-i.e. the political instability among the members of the European Union. If differences among the 16 European nations are serious or threatening, the dollar is will strengthen against the euro.
Taken together, the EUR/USD pair remains the most liquid currency pair, and its low bid-ask spreads contributes greatly to the EUR/USD’s popularity.