EUR/USD Currency Pair: Top Strategies in the FX Markets

EUR/USD Currency Pair: Top Strategies in the FX Markets 

Reading time: 7 minutes

Did you know that the US dollar (USD) is involved in almost all foreign exchange market transactions?

Did you also know that Europe’s single currency (the euro or ‘EUR’) is the second most widely traded currency?

Consequently, it should not raise too many eyebrows that the EUR/USD is one of the most traded currency pairs, as evidenced by the BIS Triennial Central Bank Survey. 

As you are probably aware, numerous factors influence the currency market, from interest rates to macroeconomic aggregate statistics and geopolitics. This raises a relevant question: how does one trade this market with so many variables to consider? 

While there are several ways traders successfully navigate and trade this market, this article aims to demonstrate some of the strategies used by professional traders.

The Blend of Macro and Technical 

Many professional traders use a combination of macroeconomic (fundamental analysis) and technical analysis as their go-to trading strategy. 

This involves assessing the macroeconomic landscape to gauge which currencies are undervalued or overvalued, monitoring monetary and fiscal policy, economic indicators (like Gross Domestic Product [GDP], inflation, employment and manufacturing, for example), and geopolitical events. If all three of these factors are aligned, you tend to see reasonably defined trending markets. When and where to enter the market then falls on the technical side. Analysing price action is a widely popular technique that firmly falls under the umbrella of technical analysis and involves evaluating chart concepts, such as support and resistance, supply and demand, candlestick patterns, and chart patterns, as well as applying tools like Fibonacci retracements, projections and extensions. Traders also commonly use technical indicators to complement price action in their trading, such as moving averages, Bollinger Bands and the Relative Strength Index (RSI).

Trading Examples

You will remember that the US Federal Reserve (Fed) has raised the Fed funds target rate by more than five percentage points since 2022 to combat elevated inflation (peaked at 9.1% in June 2022) and eventually reached what many believe to be the peak rate at 5.25%-5.50% in late 2023. As of early March 2024, the Fed has forecast to cut rates three times this year in increments of 25 basis points amidst the disinflationary process. The markets are now largely aligned with this projection. Therefore, traders understand that softer-than-expected data, particularly relating to inflation, growth and employment, can trigger selling in USD-related currency pairs, which could also benefit bonds and stocks. 

For example, combining a macro bias with support and resistance is a common approach. However, to be clear, once you understand the macroeconomic landscape, you are free to explore and use any technical trading strategy that has been proven to have an edge. 

Take the EUR/USD currency pair on the 5-minute timeframe (chart below) and recall the non-farm payrolls release for January on 2 February. The release triggered broad demand for the USD and weighed on the EUR/USD currency pair. The US economy surprised markets and added 353,000 new jobs in January, surpassing all estimates and breezing through the 216,000 jump in December. The year-on-year earnings also surged to 4.5% (M/M rose 0.6%), smashing through all estimates and the prior (4.1%).

As noted, the release sent the EUR/USD tumbling, which had traders scrambling to liquidate long positions and execute short positions. Some traders would have committed to a sell position beyond the initial support area between $1.0856 and $1.0864. Another trading opportunity into this market, however, was seen following the break of support from $1.0813 and subsequent retest as resistance around the US cash open. 

Another point worth noting here is that although the trade was entered more on the basis of short-term scalping or day trading, extended moves are common following strong out-of-consensus reports. Therefore, these trades are sometimes held longer term.   

Another clean example of combining macro analysis and technical surroundings was the UK CPI inflation data on 14 February. Inflation undershot expectations for January’s release on headline and core year-over-year readings. The former was forecast to show an increase of 4.2% but matched December at 4.0%, while the latter was forecast to increase to 5.2% but reported a rise of 5.1%, also corresponding to December’s print. As a note, headline inflation also undershot the Bank of England’s (BoE) forecast of 4.1%. Overall, the inflation numbers will be a relief for those at the BoE, particularly after the somewhat sticky wage data a day earlier (13 February) and consequently saw the GBP sell off aggressively as the report increased the odds of rate cuts occurring sooner rather than later. Although this example is not based on the EUR/USD, it could have just as easily been for the EUR/USD currency pair and related to US or euro area inflation, assuming a similar situation for the Fed or the European Central Bank (ECB).

The first entry opportunity occurred on the break of 5-minute support at $1.2587, though traders would have had to have been quick to catch this move and the entry would have likely been poor due to slippage around the release of news. The second entry opportunity into this market came on a pullback to resistance at $1.2577. This entry would have perhaps provided a more stable fill and allowed the trader to locate protective stop-loss orders above $1.2587.

Explore Macro and Technical Analysis

While this article has barely scratched the surface of how one can explore and trade the Forex market using time-served strategies, it should help provide a foundation for where to begin. To continue this journey, check out the FP Markets Academy, a dedicated place catering to beginners and advanced traders with comprehensive videos and in-depth articles. 

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