Have you ever touched the forex market?
If you are nodding yes, then there is a chance that you have come across the EUR/USD pair. It’s like the Taylor Swift of currency pairs, always in the spotlight, super active, and full of drama.
But the question is, what actually causes this currency duo to move the way it does?
Let’s learn about it and look at the top factors that influence EUR/USD price movements that too without any complicated jargon.
Factors influencing EUR/USD
Below is the real talk to help you get a grip on what’s driving those charts.
1. Interest Rates
This is the big one, and they matter… a lot!
Central banks on both sides of the Atlantic, i.e., the European Central Bank (ECB) and the U.S. Federal Reserve (Fed), have a massive influence on EUR/USD.
Here’s the deal:
- If the Fed raises interest rates, the USD tends to get stronger.
- If the ECB cuts rates, the euro usually weakens.
You must be asking Why?
The answer is that the higher interest rates attract investors looking for better returns. So, when the Fed’s offering juicy rates and the ECB isn’t, everyone wants dollars and not euros, which results in pushing EUR/USD down.
What can you do to learn about the interest rates?
All you need to do is watch out for rate announcements and press conferences, they’re the best EUR/USD trading guide.
2. Economic Data
Economic data is the news that moves. You can consider it as the heartbeat of a currency. Reports that come out every week or month tell traders whether an economy is doing well, or it is tanking.
Some of the key reports that you must look for are:
- Non-Farm Payrolls (NFP) from the US
- GDP growth rates
- Inflation numbers (CPI)
- Retail sales and manufacturing PMIs
And how to react to this data?
Here is the guide for you! If the U.S. data comes in hot—meaning better than expected—the dollar could strengthen, pushing the EUR/USD currency pair lower. But if the eurozone drops a surprise positive report, you can expect EUR/USD to bounce back. It’s one of the best forex pairs to trade, especially during key economic releases.
So, it is always important to check the economic calendar before you trade. No one likes being caught off guard.
3. Geopolitical Events
Be aware! These are the plot twists.
From elections and wars to Brexit-style exits and trade wars, political drama can really shake up the forex market.
For example, if there is political instability in the Eurozone, maybe a major country like Germany is going through election chaos. Investors will usually freak out a bit and move their money into “safer” places, like the U.S. dollar.
And what does it mean?
Obviously, this means EUR/USD drops.
On the flip side, if the U.S. is going through something like a debt ceiling crisis or political shutdown, the dollar might take a hit, boosting the euro.
Here is the bottom line:
Global events = Market moves
So, stay informed.
4. Central Bank Commentary
What if there are no fluctuations in the interest rate or no global event?
Then, what is the best time to trade forex pairs?
Even if no one changes interest rates, a speech or statement from the Fed Chair (Jerome Powell) or ECB President (Christine Lagarde) can move markets big time.
For example, if Powell hints at future hikes and traders react before it even happens. And Boom!
USD gains.
EUR/USD drops.
Those central bank speeches are always worth tuning in for.
5. Risk-On vs. Risk-Off
Ok, so this is a fun one.
Do you know that the market has moods?
- When investors are confident, they go for risky assets.
- When they are nervous, they play it safe.
What does it mean?
Here is the simple explanation:
In risk-on mode, people might move out of the U.S. dollar and enter into the euro or stocks, meaning the EUR/USD pair goes up. On the other hand, in risk-off mode, people pile into the dollar for safety, resulting in EUR/USD price drop.
This is why, during global crises, you can think of COVID-19’s early days, the dollar shot up.
It’s the world’s go-to safe haven for traders.
And to predict this?
Not rocket science (maybe sometimes!)
You need to watch stock markets and headlines as they often tell you where risk sentiment is headed.
5. Trade Balances
Hey! This one is about exports and imports.
And easy to understand as well!
If the eurozone exports more than it imports, it creates demand for the euro (because of the reason that people need euros to buy European stuff). Thus, driving EUR/USD up.
Now, the thing is that the U.S. usually runs a trade deficit, which puts slight downward pressure on the dollar in the long term.
Hey, hold on! Don’t expect overnight magic where trade balances affect EUR/USD slowly and steadily over time.
6. Technical Factors
The kick is that even if you’re a news junkie, you can’t ignore the technical side of trading.
There are a lot of traders who base their decisions purely on charts, i.e., by looking at support/resistance levels, moving averages, and trendlines.
So, always use technical analysis with fundamentals, not instead of them.
Conclusion
To conclude, there is no single magic switch that moves EUR/USD. It’s a combination of economics, politics, emotions, and market psychology, all playing out on your screen. So, if you are interested in trading this pair, always try to watch for major announcements, track interest rate expectations, check for global events, and use your charts wisely.