Why should European and American currency pairs firmly sit in the top spot in 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.

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 rich 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.

Policy and market sentiment have a significant impact

1. The policy orientation is clear: The US monetary policy is formulated and implemented by the Federal Reserve, and its policy adjustments have a direct and significant impact on the US dollar exchange rate. For example, the Federal Reserve’s decision to raise or cut interest rates will change the yield of the US dollar, thereby attracting funds to flow into or out of US dollar assets, driving the US dollar exchange rate to rise or fall. Similarly, the European Central Bank’s monetary policy will be important to the euroInfluence. Traders can pay attention to these policy trends, predict exchange rate trends in advance, and formulate corresponding trading strategies.

2. Promotion of market sentiment: Market sentiment and investors’ risk preferences also play an important role in the exchange rate changes of European and American currency pairs. When the market is optimistic, risky assets such as the euro may be sought after, driving the EUR/USD exchange rate to rise; conversely, when the market is uncertain or risk appetite decreases, investors will tend to hedge, and funds will flow to the US dollar, causing the EUR/USD exchange rate to decline.

Trading time advantage

The trading hours of European and American currency pairs are mainly concentrated in European trading hours and New York trading hours. During these two periods, there were many market participants, active trading and violent price fluctuations, providing investors with rich trading opportunities. Especially between 03:00-05:30 and 08:30-11:00 Eastern Time, that is, the late trading session of the European trading session and the opening of the New York trading session, are often the time when EUR/USD fluctuates the most. Traders can choose to trade during these periods according to their own schedule and trading habits to improve trading efficiency and profitability.

The popularity of European and American currency pairs is not accidental, but the result of the combined effect of many factors. In the ever-changing forex market, it attracts the attention of global traders. However, the market is never lacking in variables, and traders need to always maintain keen insight, use knowledge as the sword and experience as the shield, so that they can ride the wind and waves in the turbulent market waves and explore their own trading path.