Investors often adjust their prices depending on their expectations for the future. Professional markets follow financial news and the latest information about the market.
Economic forecasts are essential in determining the average expectation of developing a currency pair’s price or a share.
The EUR/USD exchange rate is subject to underlying interest rate differences, unemployment figures, inflation, capital flow, and trade.
A large part of pricing the exchange rates also falls on “event risks,” which cannot be predicted in advance, and the changing market sentiment.
History of the EUR/USD currency pair
EUR is a young currency compared to the other currencies. It was born in 1999 and has since replaced the countries’ money in the European Union: French franc, Italian lira, Deutsche mark, etc.
One of the euro’s prime features is its susceptibility to macroeconomic statistics of the entire Eurozone and individual EU countries’ indicators.
On January 1, 1999, the euro was officially introduced in non-cash circulation. It was introduced as coins and banknotes three years later, on January 1, 2002.
The euro is only second to the US dollar when it comes to the volume of international payments. The same rank applies in considering the most popular reserve world currency.
As trading began, the EUR/USD rate was around 1.1800. Since then, this currency pair has undergone significant changes.
It was unclear what would become of the euro during the first two years of its circulation. The quotation was declining and reached as low as 0.8200.
For seven years, the EUR/USD pair reached the highest peak of 1.6000 in 2008. Years after, the pair managed to correct significantly because of the various problems occurring in the Eurozone and the banking crisis’s influence.
Characteristic features of the EUR/USD pair
The EUR/USD pair is one of the major currency pairs. It is characterized by increased liquidity, which shouldn’t be surprising given that they are two of the world’s primary reserve currencies.
Most transactions in the forex market are made using the EUR/USD pair. Their behavior indicates the comparative state of the US and EU economies, which tend to be opposites.
For example, if the US economy maintains steady growth and problems arise in the EU, then the US dollar may fall.
If the US growth rates decline, good performance is observed in the Eurozone; then the EUR/USD pair will grow.
Here are some of the main characteristics of trading using this pair:
• Active trading hours
The EUR/USD pair is traded 24/5—the only exception Is the weekends. It is very active during trading sessions that involve Europe and America.
These trading sessions are when the most significant EUR/USD trading volumes take place.
• Volatility
This pair is classified with medium volatility. The pair can create strong movements from 100 points and above when vital data is released.
But if you look at their history, their average daily volatility is about 80 pips.
• Spread
This is one of the primary advantages you can reap from this pair. Because of their reputation as the highest liquidity, the spread is minimal—less than one pip on popular ECN accounts.
Predictability of the dollar in 2021
It may be easier to predict which direction the dollar will take now that the USA has President Biden.
This is partly due to how financial markets count on the new US president to deal with trade disputes more diplomatically and run less internationally.
This allows for more peace and security in the financial markets, so there is less need to maintain a haven like the dollar.
To stimulate the US economy, Biden is also expected to spend a lot of money, especially after the devastation from the COVID-19 pandemic. This will increase the position of the US debt.
Interest rates remaining low for a more extended period also plays a role because Chairman Jerome Powell hinted that there would be no interest rate hike until sometime in mid-2023.
It is then all right to estimate that capital flows that are going towards currencies and emerging markets will be flowing at the expense of the US dollar.
Mexico and Indonesia have lowered their interest rates, but they are still higher than the US’s interest rates.
Since countries like China, Taiwan, and South Korea have managed to control the COVID-19 outbreak reasonably, more investors are moving to riskier markets.
Predictions for 2021 and beyond
The EUR/USD exchange rate is predicted to maintain somewhere between 1.14 and 1.1876 USD for 2021.
For 2022, it is predicted to open at 1.316 in January and close at 1.285 by December. By 2023, it is expected to open at 1.285 in January and close at 1.172 by December.
Any long-term forecasts made on the EUR/USD currency pair are not ideal because the pair is often known to be unreliable. Many factors affect their rates, and it is better to stay up to date with the currencies in the global arena.
The following are some of the factors that can affect the EUR/USD currency exchange rates:
• Change in the interest rates of the EDB and Fed
• Consumer Confidence Index
• Growth rate of GDP
• Indices of business sentiment (ISM, IFO)
• Industrial Production index
• Inflation indices (CIP, PPI)
• Nonfarm payrolls
• Retail sales
• Trade Balance
• Unemployment rate
• Speeches by top officials
• Political events
• Force majeure (natural disasters)
Other than these factors, technical factors can also affect the currency exchange rates:
• Price patterns
These are various patterns of continuation or reversal of a trend from classical technical analysis, Price Action patterns, and candlestick patterns.
• Active trend
This is an essential factor for trading. If there is an uptrend, then traders usually opt for purchases, but if there is a downtrend, it is recommended that traders opt for sales.
Sideways trends (range) means that you can trade in either direction from the price range’s boundaries.
• Important support and resistance levels
These are historical highs and lows on the price chart. They are essential price reference points to allow analysis and to predict any future movements of the pair.
