Your guide to trading the EUR/USD pair

What is EUR/USD trading?

EUR/USD trading is buying and selling the euro (EUR) against the US dollar (USD) to speculate on the exchange rate fluctuations. Traders can use a variety of financial derivatives to trade the pair, or buy and sell physical currency. 

How does EUR/USD trading work?

In the EUR/USD market, the euro is the base currency, and the US dollar is the quote currency. This means the EUR/USD rate at any time is the amount of dollars one euro will buy. If the rate is 1.20, for example, it takes $1.20 to buy €1.

When you see a foreign exchange pair, such as EUR/USD, you will see two separate prices listed by brokers. There is the bid price, which is what you’ll get for selling the pair, and the ask price, which is what you can buy the pair for. The difference between the bid and the ask is the spread. 

The quote is measured in units, or pips. One pip is equal to 0.0001 of the quoted price spread. If the bid price is 1.21246 and the ask price is 1.21255, the spread is 0.00009, which would be 0.9 pips. It is important to take this into account when trading because the spread would have to move by at least 0.9 pips for you to break even on the trade.

Importance of EUR/USD in the forex market

The two currencies represent two economic powerhouses, meaning trading EUR/USD is extremely popular with foreign exchange (forex) traders. The currency pair is one of the most traded fiat currencies in the world. 

Incidentally, the EUR/USD pair has the nickname fibre, a follow on to the slang term cable, used for the GBP/USD pair, which was named after the underwater cables that linked the UK and US. 

The US dollar is the national currency of the US, but also serves as the main unit of value in 10 other territories, including Ecuador, Panama and East Timor. 

Meanwhile, the euro is the official currency of 20 of the 27 member states of the EU, with that number due to be increased by one in 2024, when Bulgaria drops the Bulgarian lev (BGN) and joins the Eurozone. It is also legal tender in some of Europe’s microstates, such as Andorra, Monaco, San Marino and Vatican City. 

Both the euro and the dollar, along with the British pound sterling (GBP), the Japanese yen (JPY) and the Chinese renminbi (CNY), are international reserve currencies. This means they are held by central banks across the world as part of their foreign exchange (forex) reserves. 

Why trade EUR/USD?

• Liquidity. Being one of the most traded currency pairs in the world ensures high liquidity, which means traders can easily get in and out of EUR/USD positions. 

• Market movements. The EUR/USD exchange rate is constantly moving to reflect the latest economic data releases, central banks’ policy announcements, investor sentiment, and other factors affecting the rate. 

• Trading hours. Foreign exchange markets are open 24 hours a day, giving you more flexibility in when to trade the pair. There will, however, be certain time periods with higher liquidity. 

Understanding EUR/USD market trends 

Understanding the mechanics behind the EUR/USD market trends and exchange rate history are key in developing your trading strategy. Let’s take a look at how the currency pair has behaved over the years. 

EUR/USD live exchange rate

EUR/USD brief price history

Although the idea of a single european currency had been first brought up in 1929 by German foreign minister Gustav Streseman, it was not until 1992 that the Maastricht Treaty was signed officially bringing on board plans to set up a single currency. 

In 1999, the euro was launched in digital form. In 2002, the first physical euro banknotes and coins came into circulation and the euro assumed its final form. 

The dollar, meanwhile, has been around in its current form since the Coinage Act of 1792 established it as the US’ currency. 

Although the pair became popular as soon as the euro was launched, it has not always been plain sailing. Between 2008 and 2014, the euro saw a historic record fall, after EUR/USD historical data showed it at a high of 1.5949 in July 2008. 

This followed the fallout from the 2008 financial crisis, while the US subprime mortgage crisis increased its strength, the crisis caused a recession in Europe. 

Over the next few years the EUR/USD trend was characterised by large price swings as various economic and political events affected it, with the Greek Debt Crisis a blow to the European currency. 

Late 2022 saw disaster for the euro, as record inflation, coupled with the EU’s reliance on Russian oil and gas saw it collapse below the dollar for the first time in more than 20 years during the autumn. However, EUR/USD market trends started to pick up and at the time of writing the exchange rate was about 1.08.

What moves EUR/USD?

Let’s now cast our eyes over some of the things that have an impact on the value of the dollar and the euro and, by extension, the value of the EUR/USD trading pair. 

• ECB’s policy announcements. European Central Bank (ECB) monetary policy announcements are key for EUR/USD traders as the bank releases monthly reports on interest rates decisions and economic outlook. 

• Fed’s policy announcements. The US dollar is influenced by its own central bank, the US Federal Reserve, often referred to as the Fed. The institution releases the Federal Funds rate statements eight times a year, which can provide insight into the state of the US economy and have an impact on the currency.

• Key economic data releases. Wider economic readings in the US and Eurozone, such as inflation, gross domestic product (GDP) and employment numbers, can also impact the exchange rate and can be a vital source of information for traders.

• Nonfarm Payrolls. In the US, the Bureau of Labor Statistics releases Nonfarm Payroll numbers, usually on the first Friday of every month. This is the US unemployment data and can often cause volatility in the EUR/USD pairing.

• Sentiment and confidence indicators. Investor sentiment shifts towards pessimism may boost the US dollar due to its safe-haven asset status. Investors tend to seek safe havens in times of economic uncertainty. 

• Other economic indicators. The likes of retail sales and industrial productivity also play their part in ensuring the health or otherwise of the respective economies and, by extension, the values of the euro and the dollar. 

• Geopolitical events. For instance, when Russia invaded Ukraine in early 2022, some investors left behind other currencies and put their money into the relative, or at least perceived, safety of the dollar . 

How to trade EUR/USD

If you want to get involved in EUR/USD trading, you may want to firstly choose an instrument you want to trade with, and secondly choose an appropriate EUR/USD trading strategy. 

There are a wide variety of instruments you can use for EUR/USD trading. These include using a spot rate via a forex platform, trading through a spread betting provider, or using a broker trading contracts for difference (CFDs). Let’s look at some ways to trade GBP/USD using these instruments.  

Spot trading

The spot price in FX trading refers to the current exchange rate for a currency pair. Spot FX contracts are traded over-the-counter (OTC) between banks and other financial institutions. 

Individuals can trade on forex platforms that give retail traders access to the secondary OTC market.

CFD trading 

Contracts for difference (CFD) are financial derivatives that allow traders to speculate on the price direction of an asset - for example, EUR/USD - without owning the underlying security. 

You can open both long and short positions with CFDs, and use leverage in your trading. Note that leverage magnifies both profits and losses. 

Spread betting

Similarly to CFDs, spread-betting entails trading derivatives, rather than buying and selling the underlying asset. Spread-betting can also be used for trading EUR/USD. 

Spread-betting is available in the UK and Ireland only. It’s also exempt from the capital gains tax (CGT)*. The order size from spread-betting is pounds per point, and similarly to CFDs it allows going long and short, and trading with leverage. Remember, leverage can magnify both profits and losses.

*Tax treatment depends on individual circumstances and can change, or may differ in a jurisdiction other than the UK.

Futures

Future contracts are derivative products that give traders to carry out a transaction at some point in the future at a price agreed today. If the price goes up, then the trader gets profit, yet if it falls, they lose money. Traders can use future contracts to speculate on EUR/USD exchange rate..

Futures have due dates, allowing going long and short and in some cases allowing the use of leverage, which can magnify both profits and losses. Buyers who keep their future position open beyond the due date may be bound to a physical delivery of an asset if it exists in physical form. 

Options

Option contracts too are derivatives that can be used for trading EUR/USD. An option gives a trader a right - but not an obligation - to buy an asset at a set price yet at a later date. There are call and put options, and they would always have a due date. 

EUR/USD trading strategies

You can use both fundamental and technical analysis when trading EUR/USD. There are several strategies for EUR/USD trading you can use depending on your experience, risk tolerance and preferred approach to trading. 

It’s important to review your EUR/USD trading strategy on a regular basis by keeping a trading diary to track your performance and reflect on mistakes. Make sure to always conduct thorough due diligence before opening a position. 

Day trading strategy

Day traders use short-term exchange rate volatility to speculate on an asset such as EUR/USD forex pair. They typically open and close a position within one day, and use a range of technical and fundamental analysis tools. 

Day trading may be an appropriate EUR/USD trading strategy when a trader chooses to get exposure via fast-paced derivative products.  

News trading strategy

News trading involves keeping a close eye on the news - such as economic readings and central banks announcement - that drive EUR/USD exchange rate. 

Day traders can look to news events to help decide when to buy and sell. Long-term traders also follow news events to identify trends that can influence the value of EUR/USD, meaning it can be one of the more flexible EUR/USD trading strategies. 

Trend following

Trend trading, or trend following, refers to the strategy where a trader aims to ride the waves of the market, trending in line with the current price trends. Trend followers who want to trade the currency pair would rely on EUR/USD technical analysis and its tools such as oscillators, chart patterns, and trendlines to spot the current market momentum. 

Position trading

As opposed to day traders, position traders can hold a trade for a longer time period such as a number of months or even years. Position traders ignore short-term price volatility and aim to capitalise on longer-term market trends. 

Other tips on how to trade EUR/USD

When developing your strategy for euro dollar trading, there are a few more things you may need to look at.

Trading psychology 

Ability to manage your emotions while trading is as important as your overall strategy of how to trade EUR/USD. Trading can be a highly nerve racking activity. 

For example, the distress of losing may cause you to sell at an unfavourable price level. On the other hand, the euphoria of winning may lead you to take too much risk. Hence it’s important to be aware of the key trading psychology biases.

Risk management strategy

Risk management strategy is the process of evaluating your trading risks, and developing a plan to minimise them. Note that all trading contains risk, and markets are highly unpredictable. However, there are a few tools you can use to mitigate some of the consequences:

• Stop losses. Stop loss order is an instruction you can give to a broker to close a losing position when it reaches a particular price level. It’s designed to prevent losses from continuing. Note that there is also a guaranteed stop loss, which comes at a fee. The difference is that a normal stop loss may not protect a trader from slippage in a fact-moving market environment. 

• Take-profit orders. Similarly to a stop-loss, a take-profit order is an instruction to your broker to close a position at a particular price level, yet when the position is winning. It’s designed to book profits automatically as opposed to keeping the position open while the price of an asset falls. 

• Risk-reward ratio. The risk-reward ratio is used to evaluate the potential rewards a trader can earn versus the risk they are taking. It’s calculated by dividing the potential profit by potential loss. 

Final thoughts 

EUR/USD, commonly referred to as fibre,  is one of the most traded currency pairs in the world. EUR/USD trading allows you to speculate on the exchange rate direction of the two currencies. 

Remember, that there are a number of factors that can drive the EUR/USD exchange rate, including central banks’ announcements, economic readings and geopolitical news.

Hence you can use both technical and fundamental analysis to inform your trading strategy. Equally, you can use a wide range of instruments to trade EUR/USD: from spot markets to derivatives. 

We encourage you to always conduct your own research before trading, make use of risk-management tools and keep your emotions in check. 

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