How to Trade EURUSD – Fundamentals for the Most Liquid Currency Pair

The EURUSD is the most popular currency pair in the world, thanks to the strength, size, and stability of the American and Eurozone economies. It is also popular because of its deep liquidity and the fact that most brokers provide it with the thinnest spreads. In this article, we will look at what fundamental analysis and the key data to watch when trading the EURUSD pair.

What is fundamental analysis?

To trade forex well, most investors use three key approaches. First, they consider technical analysis, which is the study of charts that incorporates the concept of indicators like Moving Averages, Average Directional Index (ADX), and the Relative Strength Index (RSI).

The second method of analysis is known as price action. It is a form of technical analysis that involves looking at charts and candlestick patterns. In this approach, you will be looking at chart patterns like triangles, bullish and bearish flags, rectangles, and pennants. It also includes candlestick patterns like harami, hammer, and engulfing, among others.

Fundamental analysis is the process of predicting the future direction of a currency pair or another asset by looking at external factors. For example, you could predict whether the EURUSD pair will rise or fall if the US economy goes through a period of weakness or if a Democrat or Republican wins an election. 

The economic calendar

Before we look at the key fundamental things to watch when trading the EURUSD pair, let us look at what an economic calendar is. It is an essential tool when conducting fundamental analysis for all currency pairs.

The economic calendar is a table, often provided for free, that provides a schedule of when key events will happen. These events could be economic data, speech by a key policymaker, a holiday, or a special event like an election. 

For economic data, the calendar has a number of sections that are important to traders. It has the previous, expected and real economic data. It also has the exact time of the day when the economic data will come out.

You can find the calendar on many free websites like DailyFx and Investing.com. Platforms like TradingView and MetaTrader 5 also have the calendar. 

Federal Reserve and the European Central Bank (ECB)

The most important entities when trading the EURUSD pair are the Fed and the ECB. They are the central banks of the United States and the European Union, respectively. 

The two banks have three mandates. First, they are tasked with ensuring the stability of the financial industry by regulating banks. Second, they are responsible for ensuring that there is price stability in the country. Finally, they are tasked with ensuring that there is a low unemployment rate.

To achieve this, the final two mandates, the ECB and Fed have several tools at their disposal. The most common tool is interest rates, and in periods of dire strains, the banks can initiate programs like quantitative easing (QE). QE is a program where the bank prints money and then buys assets like bonds and mortgage-backed securities (MBS). 

In the fundamental analysis for the EURUSD pair, all economic data that traders follow usually point to the Fed and ECB. 

Inflation data

One of the most important economic data to watch when trading the EURUSD pair is US and EU inflation. In this, there are three essential key numbers that you will find in the economic calendar. 

First, there is the consumer price index (CPI) data. It is a number that simply shows the overall change in prices of general items that people buy. These items include things like food, tobacco, alcohol, and furniture. A subsector of the CPI known as core CPI excludes the volatile food and energy prices.

The US inflation numbers come once a month. In the Eurozone, Eurostat usually publishes CPI numbers two times per month. The initial one is the final figure for the previous month and the second one is the estimate for the current month.

Second, there is the Producer Price Index (PPI) data, which measures inflation in regards to companies and other producers. 

Finally, there is the personal consumer expenditure (PCE) data. The number comes just from the US and is known to be the Fed’s most favorite inflation indicator. 

Employment numbers

The next key important data when trading the EURUSD pair is the US and EU jobs numbers. The US publishes its jobs data every first Friday of the month. In most cases, these are the numbers that move the pair a lot. While the monthly Eurozone jobs numbers are important, their impact on the EURUSD tends to be muted.

Other economic data

Below are other economic numbers that are important for the EURUSD pair. 

• Manufacturing and services PMIs – These numbers are published by Markit, a leading data firm. In the US, they are complemented by those from the Institute of Supply Management (ISM). 
• Retail sales – The data measures the performance of the retail sector, which is a leading employer in the two regions. 
• Consumer confidence – Consumer spending is the biggest part of the US and EU economies. Therefore, consumer confidence has an impact on the EURUSD pair.
• Housing data – The housing market is also crucial in the two regions. In most cases, the housing data that move the pair are from the US. They are housing starts, building permits, new and existing home sales, and home prices.

In theory, strong economic numbers from the US tend to put pressure on the Federal Reserve to intervene in the market. For example, it can hike interest rates or signal that it will hike rates. If the Fed is hawkish and the ECB is not, the impact is that the pair will retreat.

Other key things that move the pair are related to geopolitics or market risks. When there are elevated risks, the pair will decline as investors move to the safety of the US dollar. 

Summary

The EURUSD pair is a popular currency pair among forex traders. It is a highly liquid pair that has thin spreads, making it more affordable than other crosses. In this article, we have looked at the key fundamental data that move it. Still, we recommend that you combine this fundamental data with the other trading approaches we mentioned, like technical analysis.