As inflation reached record levels across much of the developed world in April, it’s looking more likely that many central banks could follow the Federal Reserve’s hawkish turn. Accordingly, the values of several key Forex pairs could be set for a shift.
Over the past several trading sessions, the U.S. dollar has been losing against some other major global currencies. The proximate causes may include weakening optimism regarding inflation as well as improving economic prospects in Europe and China.
EUR/USD is the currency pair of the United States dollar vs the euro, the shared currency of the Eurozone. USD and EUR are the most heavily-traded currencies in the world, covering more than half of the total trading volume in the Forex market. The currency pair indicates how many US dollars are needed to purchase one euro. For example, if the pair is trading at 1.35, it means you need 1.35 USD to buy 1 EUR.
In CFD trading, your profit (or loss) is determined by reference to the price movement of the currency pair. You are not buying or selling the underlying asset.
Among the factors affecting the price movement of EUR/USD are:
US Fed and EU ECB interest rates - The Federal Open Market Committee (FOMC), a committee within the United States Federal Reserve System (the Fed), meets on a bi-monthly basis, and makes key monetary policy decisions on interest rates and money supply.
The European Commission, an institution of the European Union, typically holds a monetary policy meeting once a month, and is responsible for managing the day-to-day business of the EU – one of the largest trading blocs in the world.
For example, higher interest rates in the US decrease the supply of US dollars in the market, typically causing EUR/USD to fall.
Lower interest rates in the US raise the supply of US dollars in the market, typically causing EUR/USD to rise.
Employment numbers - On the first Friday of every month, the US Department of Labor's Bureau of Statistics releases the Employment Situation Summary for the previous month. The report, which is commonly known as NFP (nonfarm payrolls) or 'jobs report', is an influential statistic on the state of the labor market in America. It represents the number of jobs added or lost over the last month, as well as the change in the unemployment rate.
The Eurozone does not have consolidated employment figures. However, job results and unemployment reports for the major economies in the trading bloc – Germany, France and Italy – tend to have an effect on the exchange rates of the euro.
Geopolitical tensions and uncertainty - Political uncertainty, and/or instability between the EU and US has a major effect on the price of EUR/USD. Not knowing what will happen to political, social and economic realities in these trading blocs can have a psychological effect on day traders who wish to profit from price changes in EUR/USD and other financial instruments.
Foreign currency exchange rates are influenced by the difference in value of a currency or economic region, such as the euro (EUR) in comparison to another country's or region's currency, such as the United States dollar (USD).
This difference is based on the terms of trade, political stability and overall economic performance between these countries or regions, as well as their economic growth, economic health, interest rates, inflation rates and balance of payments (exports, imports, government debt, etc.).
If USD gains value, the EUR/USD pair falls.
If USD loses value, the EUR/USD pair rises.
For more information, read ‘What are the economic factors affecting EUR/USD trading?’.