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Thursday, October 15, 2009

EUR/USD

By AHmad Hassam

EUR/USD is the most liquid and the most popular currency pair among the forex traders. Trading currencies can be exciting and lucrative. Its a great market because of the way politics affect the trends. Elections, strikes, and sudden developments, both good and bad, can lead to significant trading profits if you stand ready to trade the euro is a convenient currency because it encompasses the policies and the economic activity and political environment of a volatile but predictable part of the world: Europe. EUR/USD is the most heavily traded currency pair in the global currency markets at the moment.

In the United States, where the free-market approach and a usually vigilant Federal Reserve make more frequent adjustments on interest rates. France, Italy, and Germany, the largest members of the European Union (EU), normally operate under high budget deficits and tend to keep their interest rates more stable.

The general tendency of the Fed is to make the dollar trend for very long periods of time in one general direction. Aside from the technical analysis, here are some general tendencies of the euro on which you need to keep tabs:

1) As said before most central banks in the world have a strict agenda to fight inflation. Given Germanys history of hyperinflation in the first half of the 20th century and the repercussions of that period, namely the rise of Hitler, the European Central Bank (ECB) is almost fanatical about inflation. That means that the European Central Bank most of the times raises interest rates more easily than it lowers them. However, right now keeping in view the severe global recession, ECB has lowered the interest rates drastically to stimulate economic activity across the Eurozone.

2) The US and the EU are two major trading partners. This gives EUR/USD currency pair very interesting characteristics. EUR/USD pair is affected by what is happening politically and economically both in Europe and the US. The European Central Banks actions become important when all other factors are equal, meaning politics are equally stable or unstable in the United States and Europe, and the two economies are growing. For example, if the U.S. economy is slowing down, money slowly starts to drift away from the dollar. In the past that meant money would move toward the Japanese yen; however, because the market knows that Japans central bank will sell yen, the default currency when the dollar weakens is often now the euro. USD is inversely correlated to the gold prices. All these facts should be taken into consideration while forming your bias about a particular currency pair.

- The flip side is that the market often sells the euro during political problems in the region, especially when the European economy is slowing and the economy in the United Kingdom (UK), which often moves along with the U.S. economy, is showing signs of strength.

As a word of caution, its okay to form an opinion and have some expectations, but the final and only truth that should make you trade is what the charts are showing you. Candlestick charting is one way to read the markets. There are many candlestick patterns that are used to signal trend reversals or change in the market behavior. The more proficient you become in reading candlestick charts the more profitable your trades would be. As usual, you want to closely monitor major currencies and the cross rates. The direction that counts is the one in which the market is heading. Candlestick charts are a good way to read the direction in which the markets are heading.

Combining fundamental analysis with the technical analysis can give you the edge as a forex trader. Fundamental analysis can help you determine the strong/weak currency pair. Use fundamental analysis to determine if USD is expected to lose value and EUR is expected to gain more strength that means that the currency pair EUR/USD is perfectly timed for swing trading. Use technical analysis to make the entry and exit decision. - 23212

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