icon icon Home
icon icon Accounts
icon icon Quick start
icon icon Symbols
eur/usd

Euro / U.S. Dollar

Trade the world’s most popular currency pair and seize the best opportunities in the forex market.

Technical and Fundamental Analysis of the EUR/USD Pair

avatar
Reza Naderi
EUR/USD
NOVEMBER 1, 2024

Euro Faces New Challenges: Economic Slowdown and Political Upheaval in Germany

The Euro is once again under intense pressure as a combination of economic and political factors creates fresh challenges. On one front, the Eurozone economy is lagging behind major competitors, showing little indication of significant growth. Meanwhile, Germany—the Eurozone’s economic powerhouse—is gripped by a political crisis following the collapse of its coalition government, adding further uncertainty to the region.

Germany is now preparing for early elections set for February 2025 following the breakdown of its center-left coalition last week. This decision came after escalating budget disagreements, leading Chancellor Olaf Scholz to dismiss Finance Minister Christian Lindner. Lindner, leader of the Free Democratic Party (FDP), exited the coalition due to economic conflicts, ending the alliance between Scholz’s Social Democrats (SPD), the Greens, and the FDP.

If Scholz is unable to win a parliamentary vote of confidence, German President Frank-Walter Steinmeier could dissolve the parliament, triggering a new election within 60 days. This decision highlights deep ideological divisions within the ruling coalition, particularly over national finance and budgeting issues.

Given the current economic and political climate, the upcoming election could have a substantial impact on Germany’s—and, by extension, Europe’s—future direction. The far-right Alternative for Germany (AfD) party, currently polling well, could significantly shape Germany’s domestic and Eurozone policies.

The prospect of AfD gaining influence poses a unique challenge for the Euro. An AfD victory would represent a new phase of far-right influence in Europe, potentially sparking a “Brexit 2.0” scenario. Such an outcome could reshape existing tax and immigration policies, disrupt the European Central Bank’s (ECB) current policy framework, and likely lead to a further decline in the Euro (EUR) as the markets react to this seismic shift.

 

Interest Rate Gap: A Warning for the Euro Post-Trump Victory

Donald Trump’s re-election signals a continuation and expansion of tax cuts and broader trade tariffs compared to his first term. Such policies are expected to be inflationary, necessitating fewer interest rate cuts by the Federal Reserve. For Europe, this scenario is concerning, as it may require the European Central Bank (ECB) to implement more aggressive rate cuts.

Currently, there’s already a notable interest rate differential between Europe and the United States, often referred to as the “Atlantic gap.” Trump’s victory is likely to widen this gap further. Presently, the two-year swap rate between the euro and the dollar favors the dollar by over 1.8%, a level not seen since 2022. This widening interest rate gap strengthens the dollar while weakening the euro. Markets are now awaiting more concrete evidence to determine whether this trend will persist or if conditions will shift.

Eurozone GDP and Germany’s Economic Outlook: A Path Forward for the Euro in the absence of ECB Signals

On Tuesday, European financial markets will closely scrutinize Germany’s Economic Sentiment Index to gain a clearer view ahead of the upcoming Eurozone growth data. Forecasts suggest only a slight 0.1% improvement in Germany’s economic outlook, but stronger-than-expected results could give investors some optimism about Germany’s economic resilience amid ongoing political turmoil.

On Thursday, the preliminary Eurozone GDP figures for the third quarter will be released, with an expected growth rate of around 0.4%. If the reported GDP growth surpasses expectations, it could lead to a rise in the EUR/USD pair, though any such increase is unlikely to be significant or lasting.

Given current conditions, speeches from European Central Bank (ECB) members throughout the week are unlikely to impact the ECB’s upcoming decisions, especially regarding December’s anticipated rate cut. The main question that remains is whether the rate cut will be 0.25% or 0.5%. Stronger growth data and a cooling of post-election uncertainty in the US could further support the likelihood of a 0.5% rate cut.

Will U.S. Consumer Inflation Accelerate Selling Pressure on the Euro?

September brought distinct developments to the U.S. economy, reviving discussions around inflation trends. Annual inflation decreased for the sixth consecutive month, reaching 4%—a level not seen since February 2021. At first glance, this reduction seemed promising for the markets, but the story didn’t end there.

In the same month, core inflation drew attention, ticking up slightly to 3.3%, just above the previous three-year low of 3.2%. This modest increase was driven by monthly inflation, which came in at 0.3%, exceeding the forecasted 0.2%.

Looking ahead to October, projections suggest that annual inflation may rise to 2.6%, with core inflation holding steady at 3.3%. If these figures come in higher than expected, the U.S. dollar is likely to strengthen further, potentially increasing selling pressure on the euro—especially if the European Central Bank stays its current monetary policy course.

Buy Plan:

If EUR/USD holds above the key support level of 1.05115 and stabilizes, a bullish correction is expected toward targets of 1.07994 and potentially even 1.08445. This range can serve as an entry point for a buy trade.

Sell Plan:

If the 1.05115 level is breached and the price stabilizes below this level, the downtrend is likely to continue. In that case, the next targets for selling would be 1.04111 and 1.03139.

Additionally, the 1.06008 level may act as an initial barrier, slowing the pace of any decline. However, if bearish sentiment dominates, it could also be a point for a short-term sell entry.

Analysis Summary

The euro faces significant political and economic challenges. The Eurozone economy is experiencing slow growth, and the collapse of Germany’s coalition government—the largest economy in Europe—has added to the instability. Early elections in Germany and the potential rise of the far-right AfD could have negative implications for the euro. Furthermore, if Trump is re-elected, the European Central Bank may cut interest rates further, deepening the interest rate gap with the U.S. and strengthening the dollar.

In technical analysis, the 1.05115 level serves as a key support for EUR/USD; holding above it could open the way for a corrective rally up to 1.07994. However, breaking below it could lead to bearish targets at 1.04111 and 1.03139.

EUR/USD

Introduction
to the EUR/USD Currency Pair

The EUR/USD currency pair represents the value of the euro in comparison to the US dollar. This pair shows how many US dollars are needed to purchase one euro. For example, if this pair is trading at a rate of 1.70, it means that 1.70 US dollars are required to buy one euro.

Informally known as "Fibre," the EUR/USD pair was introduced in 1999 when the euro replaced several European national currencies. The initial value of the euro against the dollar was based on the European Currency Unit, a symbolic currency tied to a basket of various European currencies. It is not mandatory for all European Union countries to adopt the euro; as of 2021, only 19 of the 27 EU member countries had accepted the euro as their official currency.

The Importance of the EUR/USD Pair in the Forex Market

The EUR/USD currency pair holds particular significance in global markets, including forex, as a symbol of the competitive economic relationship between the United States and Europe. Given that the US and Europe are two of the world’s largest economic regions, the EUR/USD pair is the most traded currency pair globally, attracting attention from a wide range of traders and investors, from retail participants to major institutions.

Factors_Influencing_the_EURUSD_Exchange_Rate

Factors
Influencing the EUR/USD Exchange Rate

Any factor that affects the value of the euro and the US dollar relative to each other and to other currencies will impact the value of this pair. Influential elements include interest rate differentials between the European Central Bank (ECB) and the Federal Reserve (Fed), positive or negative news about the EU or US economies, news regarding government debt crises, monetary policies such as quantitative easing, migration programs, and more—all of which influence the EUR/USD pair.

For example, when the US aggressively pursued a bond-buying program, the European Central Bank refrained from implementing quantitative easing policies for several years. This led traders to favor buying the euro, strengthening it against the dollar. This trend continued until the Greek debt issue reached a critical point in October 2009, causing the euro’s value against the dollar to decline, as the ECB launched its quantitative easing program in January 2015.

Another example occurred in 2022 when the EUR/USD pair fell below 1.00 for the first time in history. This was due to rising interest rates in the US, which increased the dollar's value, while the Ukraine war and the ensuing energy crisis placed severe pressure on the European economy.

The_Role_of_the_European_Central_Bank_and_the_Federal_Reserve_in_the_EURUSD_Exchange_Rate

The Role
of the European Central Bank and the Federal Reserve
in the EUR/USD Exchange Rate

The European Central Bank (ECB) and the Federal Reserve (Fed) play a fundamental role in determining the EUR/USD exchange rate, as their monetary policies directly impact the value of the euro and the dollar. For instance, when the Fed raises interest rates, investors tend to prefer the dollar over the euro due to higher returns, leading to an increase in the dollar’s value and a decrease in the EUR/USD rate. Conversely, if the ECB raises interest rates or reduces supportive policies like quantitative easing (QE), demand for the euro increases, causing the EUR/USD rate to rise.

EUR/USD

Common Trading Strategies for EUR/USD

Traders interested in trading the EUR/USD pair typically use one of three main trading styles:

EUR/USD
Scalping: Scalpers hold their trades for a short period, usually only a few minutes
EUR/USD
Day Trading: In this style, trades are held for several hours throughout the day and are closed by the end of the trading day
EUR/USD
Swing Trading: Swing traders aim to follow a weekly or monthly trend. They open trades when a clear trend is observed. However, this style is less common for EUR/USD compared to the previous two.

In addition to these strategies, traders also employ other styles, such as position trading and news-based trading, when trading the EUR/USD pair.

Comparison of EUR/USD
with Other Major Currency Pairs

High trading volumes, strong liquidity, and solid economic backing are common traits among the major forex pairs, including GBP/USD (pound to dollar), USD/JPY (dollar to Japanese yen), and AUD/USD (Australian dollar to US dollar).

However, comparing their differences, the EUR/USD generally shows less volatility than the GBP/USD, as the Eurozone and US economies are closer in terms of economic stability. In contrast, GBP/USD may experience higher fluctuations due to political and economic events in the UK, such as Brexit.

The USD/JPY pair also experiences significant volatility due to the large differences in monetary policies between the Bank of Japan and the Federal Reserve. Japan’s low interest rates and expansionary policies often make USD/JPY a tool for carry trade strategies, benefiting from interest rate differentials—a feature rarely seen in EUR/USD due to smaller interest rate differences.

Additionally, the AUD/USD is heavily influenced by commodity prices and economic developments in China, as Australia relies on China as a major raw material buyer. In comparison, EUR/USD is more dependent on the monetary policies of the European and US central banks and the economic conditions in the Eurozone and the US.

Therefore, due to its stability and high trading volume, EUR/USD is often favored by global investors and serves as a valuable tool for analyzing broader economic trends.

Historical Volatility of the EUR/USD Pair

Since its inception in 1999, the EUR/USD currency pair has experienced numerous ups and downs, some of which have been particularly noteworthy and memorable in the pair's history. Key historical fluctuations include:

  • The initial drop below 1.00 in 2000 due to low confidence in the euro;
  • EUR/USD's surge to a peak of 1.60 in 2008, driven by the US subprime mortgage crisis and the resulting decline in dollar value;
  • A sharp decline in the euro’s value against the dollar in 2015 due to the European Central Bank's reduction in quantitative easing;
  • A notable drop in EUR/USD during the COVID-19 pandemic, influenced by extensive support policies and prevailing economic uncertainty.

As observed, these historical fluctuations provide valuable insights into economic conditions and macroeconomic events affecting the EUR/USD pair.

Key_Points_for_EURUSD_Traders

Key Points
for EUR/USD Traders

Paying attention to subtle aspects of trading EUR/USD—the world’s most popular and liquid currency pair—can significantly improve traders' performance and win rate. Consider the following points:

  • Choosing the Right Trading Session: For EUR/USD day traders, the optimal trading window is from 7:00 to 20:00 GMT. During this period, there’s enough movement to cover spreads and commission costs and still make a profit. The best time to trade is between 13:00 and 16:00 GMT when both the London and New York markets are open. This overlap generates high trading volumes, providing ample profit opportunities and typically offering the tightest spreads of the day.
  • Monitoring US and Eurozone Economic Data: Key economic data like interest rates, unemployment rates, Consumer Price Index (CPI), and Gross Domestic Product (GDP) directly influence the EUR/USD value. For professional traders, tracking the economic calendar and comparing forecasts with actual results can provide deeper insights into market reactions.
  • Considering Market Sentiment: EUR/USD traders use sentiment indicators, such as the Commitment of Traders (COT) report and economic surveys, to gauge market sentiment. Understanding whether the majority of traders are inclined to buy or sell can help adjust trading strategies accordingly.
  • Following the Latest Developments in ECB and Fed Policies: Changes in the European Central Bank (ECB) and Federal Reserve (Fed) policies, especially regarding interest rates and monetary easing or tightening, can greatly impact the EUR/USD rate. Professional traders closely analyze statements and press conferences from these central banks.
  • Effective Use of Technical Analysis Alongside Fundamental Insights: Specific chart patterns, such as the head and shoulders or double-top and double-bottom patterns, frequently appear on the EUR/USD chart. Professional traders analyze these patterns across various timeframes and use them as signals for trend reversals or continuations. Additionally, proper use of other technical analysis tools helps traders identify optimal entry and exit points.
  • Risk Management and Emotion Control: While risk management is essential in any trade, the EUR/USD pair, despite being a more liquid and analyzable market, requires particular attention to risk due to the multiple factors influencing its movements.
Final_Recommendations_for_Successful_EURUSD_Trading

Final Recommendations for Successful EUR/USD Trading

In summary, to succeed in trading the popular EUR/USD pair, understanding and focusing on its key driving factors can help traders make more informed decisions. Analyzing historical, fundamental, and technical data are all essential tools for understanding market trends and seizing trading opportunities in this pair. Furthermore, emphasizing sound capital management and the effective use of related tools are indispensable elements in this journey.

LatestEUR/USD
Latest
Oldest
Most Popular
Document

10 thousand nano accounts are waiting for you!

Try your luck

From Friday to Saturday;
November 1th to December 8th
notif_en notif_bg_mobile