Trading exceeds trillion US dollars every day! Why are European and American currency pairs always the king of trading volume?

Forex, in short, is a currency exchange game that crosses national borders. When you embark on a foreign country and need to exchange local currencies, you have become a participant in the foreign exchange market. The fluctuations in exchange rates between currencies are an opportunity to win profits in the foreign exchange market.

Among many currency pairs, the European and American currency pair (EUR/USD) is the most popular, attracting the attention of countless traders. It not only accounts for one-third of the global foreign exchange trading volume, but it is also the first choice for beginners. So, what magic does this pair have that makes many traders flock to it?

What are European and American currency pairs?

European and American currency pairs refer to the exchange rate between the euro (EUR) and the US dollar (USD) in the foreign exchange market. This currency pair is the most active in trading, representing how much US dollars you can buy one euro or how much euro you can sell one dollar for.

USD (USD)

The US dollar is the official currency of the United States and is issued by the Federal Reserve (Fed). It is the world’s largest trading currency with daily trading volume of up to $2.2 trillion. The US dollar is not only the currency of the United States, but also the world’s major reserve currency, and is widely held by central banks and financial institutions in various countries.

Euro (EUR)

The euro is issued by the European Central Bank (ECB), is the official currency of the 19 member states of the euro zone. It simplifies cross-border transactions between member states. Although the euro system is relatively complex, the exchange rate of the euro against the US dollar is relatively stable, with the average daily fluctuation amplitude usually ranging from 30-40 basis points, and about 60 basis points during large fluctuations.

Reasons for leading trading volume of European and American currency pairs

High liquidity

The primary reason why EUR/USD is the largest currency pair in the world is its unparalleled liquidity. This is mainly due to the widespread acceptance of the US dollar as a global reserve currency and trading medium, and the broad economic region represented by the euro as a common currency of the major EU economies. The combination of the two forms the world’s largest economic and financial trading block, attracting investors and traders from all over the world.

High volatility

Although EUR/USD shows relative stability due to the stability of its economic base, this does not mean that it lacks volatility. In fact, since the EU includes multiple countries that have important influence on the global economy, its economic conditions, policy changes and changes in market sentiment may have an impact on the euro, which is reflected in the EUR/USD exchange rate. This diversity not only increases the volatility of currency pairs, but also provides traders with abundant trading opportunities. However, EUR/USD volatility is generally more controllable compared to a single economic currency pair, reducing the risk of extreme volatility.

Low spreads and low transaction costs

EUR/USD’s high liquidity further drives its spread to lower. Spreads, as part of transaction costs, have a direct impact on traders’ profitability. Due to the large trading volume and strong liquidity of the currency pair, trading platforms can often provide more competitive spreads, thereby reducing traders’ trading costs. In addition, high liquidity also reduces the occurrence of slippage phenomena, ensuring transaction execution efficiency and price accuracy.

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European and American currency pair trading hours
The most important trading hours for European and American currency pairs (EUR/USD) are from 3 a.m. to 3 p.m. that day, which is the most active 12 hours of euro and dollar trading.

The late trading session of the Asian session overlaps with the early trading session of the European session, and the London LIFFE opened at 8:30 am Greenwich Time, when trading in the Singapore market is still there; the afternoon trading in the European session overlaps with the morning trading in the US market. These two periods, especially the latter period, are often the periods with the largest trading volume and volatility in the euro. Large institutions in the US market generally enter the market after 11 o’clock, because the market conditions on that day were already clear.

Key factors affecting European and American currency pairs

1. The weather vane of economic data

Economic data is like a barometer of the market, directly affecting the exchange rate trend of the euro and the US dollar. Strong U.S. economic data, such as steady GDP growth, job market boom and consumer confidence, usually strengthen the US dollar’s market position, which in turn drives the euro-dollar exchange rate downward. On the contrary, the positive performance of the euro zone economic data may inject upward momentum into the euro and drive the exchange rate to rise.

2. Regulatory power of monetary policy

Central Bank’sMonetary policy is the driving force behind exchange rate fluctuations. The interest rate decisions and policy orientation of the Federal Reserve and the European Central Bank directly affect the nerves of the market. When the Fed tightens monetary policy, such as hikes or sends out a signal of interest rate hikes, the US dollar often strengthens, and the euro-dollar exchange rate is under pressure and downward. If the European Central Bank takes similar measures, the euro may usher in an opportunity for appreciation and the exchange rate will rise accordingly.

3. The dual influence of political factors and market sentiment

Whether political stability is also an important consideration for exchange rate changes. Political turmoil in the euro zone, such as uncertainty in the election results and the haze of the debt crisis, may weaken market confidence in the euro and prompt a decline in the euro-dollar exchange rate. The political stability of the United States is usually regarded as the cornerstone of the US dollar. In addition, market sentiment and investors’ risk preferences also invisibly influence the direction of the exchange rate. When the market is optimistic, risky assets such as the euro may be sought after; otherwise, they may trigger risk aversion and drive funds to flow to the US dollar.

Overall, European and American currency pairs (EUR/USD) have become the favorites of traders (especially novice traders) in the forex market with their excellent liquidity, moderate volatility, compact spreads and low trading costs. However, it is worth noting that although EUR/USD has many advantages, traders still need to pay close attention to market trends, formulate careful trading strategies, and strictly implement risk management measures in order to win and not defeat in the market for a long time.