Major factors affecting the direction of EUR/USD

Major factors affecting the direction of EUR USD
Photo: Jojooff, Pixabay

The foreign exchange rate is influenced by many factors. For the major currencies operating in this market, the economic factors that prevail in their backing economies have everything to do with the exchange rate. Two of the major currencies in the foreign exchange market are the Euro and the US dollar. These two currencies are both supported by the major economies in the West.

The economies in these areas can be described as advanced. There is thus no single major factor that influences the value of the currencies. There are however some important distinguishing factors between the economies of the USA and of those in Europe. The EUR/USD pair is very powerful and it is one of the most traded pairs. The dynamics that influence the direction of this pair are thus consequential. The following are the major factors that influence the direction of EUR/USD.

Sessions

The forex market operates around trading sessions. In general, there are two key sessions that influence the trading activity. The Asian session operates at different times compared to the Europe and US sessions. When the data is being released in the Europe and US sessions, there is slight trading in the Asian session.

Also, the little moments when the traders are out for lunch breaks are significant enough to drive the exchange rates on the slow side. As for trading times, the European generally closes out at 5:00 GMT and this takes out the liquidity. The small-scale shifts in the trading patterns and sessions are thus crucial in moving the direction of the EUR/USD.

Politics

Political shifts are also important when it comes to the movement of the EUR/USD pair. Just like other trading pairs, political instability is a huge factor that influences the exchange rates in Europe and America. In recent years, the Brexit phenomenon has particularly been influential to the movement of the currency pair. The elections in the USA also had a significant impact on the pair.

Other political decisions that particularly touch on economies also affect the exchange rate of the pair. There is always a keen interest on what decisions are being made constantly in the market.

Institutions and personalities

The banks in Europe and the USA have a huge impact on this currency pair. Institutions all around the world have their fair share of influence on the economy. The monetary institutions are particularly influential in the determination of the direction of the pair.

The central banks in Europe mandated with checking the money supply, interest rates and the monetary policy, in general, can make decisions that affect the foreign exchange rates either immediately or over time. The key announcements made by big figures and personalities also have a huge influence on the forex market.

The short-term and long-term volatility in the market is often influenced by institutions and personalities.

Economic reports

Reports on the economy are also crucial when it comes to the movement of the EUR/USD. Economic reports are made constantly on either an annual or biannual basis. The GDP reports particularly come once every year and they are important for showing the overall direction of the economies.

Since the economic performance is directly tied to the forex market, it does not take much to see changes in the market after these reports are made. Since there are many economic reports that are made though, the most important ones that have had historical effects on the forex rates are usually considered first.

Interest rates

Finally, interest rates are at the center of most changes at the foreign exchange market. While not as directly correlated as other factors, interest rates are nevertheless quite important. The changes in interest rates in the USA are particularly of value because it is a huge single market.

Generally, economic occurrences have shown that when the interest rates are generally higher in Europe, then the Euro is stronger than the dollar. This is also true for the USA and the dollar. The discrepancy in value created as a result of the interest rates thus moves the rate of the UR/USD in either direction.

In short, the rate of the EUR/USD is affected by the common factors that affect other currency pairs. The extent to which the above factors affect this pair differs compared to the other pairs in the market. This currency pair is the most traded in the market and traders need to consider the factors that result in its movement.