Traders need to consider that the US dollar is present in all major currency pairs, as it has the status of a global reserve currency. This was established in 1944 during the Bretton Woods Agreement.
The second important point – the American economy is the most developed in the world and has a direct or indirect effect on all other currencies. This is especially true for direct US trading partners.
For traders, this fact makes it relevant to a search for pairs that can replace the dollar at the time of exchange rate instability or problems associated with the US trade expansion.
The most liquid alternative, in this case, is the pair EUR/JPY. It does not depend too much on dollar fluctuations. Also, both currencies are regarded as temporary storage of capital.
Changes in the EUR/JPY pair are based on the results of some European economic indicators or Japanese monetary policy. In addition, stock market results may affect the Japanese yen.
As for the euro, it is directly related to the European economic situation and reports. Everything that happens inside the eurozone is really important, even social events such as terrorist acts.
Mutual correlation of the pair is associated primarily with the results of the meeting of the European Central Bank (ECB), which is held eight times a year. After the meeting, authorized representatives of the ECB hold a press conference at which the topics of discussion and the results of negotiations are announced.
For traders, this information may be even more useful than interest rate data, as bankers’ statements reveal the problems that the ECB has encountered or expects to encounter.
Also, the PMI index of fundamental importance. Its data is published monthly and shows the current state of the services market. This information is subsequently used by the ECB to decide on the interest rate.
How to trade
As for Japan, it’s easy to guess what to look for. We are talking about meetings of the Bank of Japan, press conferences and any communications related to them.
The Central Bank is the main driving force in any country because it determines the economic path of the state. In Japan’s case, special attention should be paid to the position of the national bank regarding the purchase of government bonds.
The quantitative easing program practiced by the Japanese Bank is the longest and largest in the world, so any information on this issue will seriously affect the yen.
Typical economic reports, such as the Consumer Price Index, GDP growth, Tankan index, etc., are also considered powerful drivers of the EUR/JPY cross rate.
In Japan, interest rates and inflation have the same relationship as in any other country – whenever inflation rises, we can expect that the interest rate will also be increased, and vice versa.
Also, traders need to clearly understand that Japan is a small country without its mineral reserves and energy resources. The price of the yen directly depends on the situation in the commodity market.
The strength of the Japanese economy is the export of automobiles and high-tech products. In this regard, the United States is the country’s largest partner. Any decrease in turnover will inevitably lead to a weakening of the yen.
Despite the abundance of factors, it is quite easy to trade EUR/JPY. The news background is certainly of great importance, but the high correlation of currencies allows the use of technical analysis tools.
Due to low volatility, high liquidity and relative simplicity, not only experienced traders, but also beginners prefer the pair. Getting a good margin with this instrument is not difficult.