Major Currency Pair Decoded: Ultimate Guide to global foreign exchange market

What is Currency Pair  

A pair of currencies refers to the exchange rate of two different types of money. For instance, if a trader is quoted 1.13 for the euro and 1.13 for the US dollar, they can then exchange 1 Euro for 1.13 US dollars.

The value of a currency changes as it changes against another. For instance, if the EUR/USD exchange rate goes from 1.13 to 1.15 tomorrow, it means that the European currency has appreciated against the US dollar. On the other hand, it means that the US dollar has lost value against the Euro due to the cost of buying 1 Euro.

What are the Major Currency Pairs

The definition of ‘major currency pairs’ will vary from trader to trader, but most will include the four most popular pairs to trade – EUR/USD, USD/JPY, GBP/USD and USD/CHF. Commodity currencies and cross pairs are also categorized as majors. Below we will explore the major currency pair categories.

Major Currency Pairs

The most traded currency pairs are listed below. They represent some of the world’s largest economies and are traded in high volumes. Higher volumes tend to result in tighter spreads.

EUR/USD – Euro Dollar

The EUR/USD (Euro/US Dollar), nicknamed the “Fiber”, is the most traded currency pair in the world, accounting for 23% of all foreign exchange transactions in 2016. The two largest economies in the world, the US economy and the European Union, are represented by the Euro and the US Dollar.

EUR/USD trades at tight spreads due to its popularity. High volumes lead to a reduction in the price difference between the bid and the offer.

USD/JPY – Dollar Yen

The second most traded currency pair is the USD/JPY (US Dollar/Japanese Yen), also known as “The Ninja”. The Yen is often used by carry traders, who borrow the Yen and invest it in a currency with a higher rate of return. The Bank of Japan has been fighting low inflation and low growth for many years. As a result, it has a very low interest rate.

The USD/JPY also trades in high volumes, resulting in low bid/ask spreads and high liquidity. The yen, among traders, is also known as a safe haven currency.

GBP/USD – Pound Dollar

Due to the underwater cables that once carried bid and ask prices across the Atlantic Ocean, the GBP/USD (Pound Sterling/US Dollar) is nicknamed the “cable”.

There are many similarities between this major forex pair and the EUR/USD. Both are highly correlated. This is due to the UK’s economy being tied to the European Union.

Due to its high liquidity, traders enjoy tight bid-ask spreads on the GBP/USD.

USD/CHF – Dollar Swiss Franc

The USD/CHF cross, also known as “Swissy”, derives its popularity from the safe-haven status of the Swiss franc. When risk/volatility enters the market, traders bid up the Swiss franc as the Swiss economy is seen as less risky.

What are Cross Pairs 

A cross currency pair does not include the US dollar. Back in the past, a currency could only be exchanged against the US dollar before being able to be used against other currencies. Some of the most popular cross pairs include the EUR/GBP, EUR/JPY, and the EUR/CHF.

What Affects The Rates Of Major Currency Pairs

Interest rates – Central banks are mandated to maintain monetary and financial stability. One way they do this is through the manipulation of interest rates. When a central bank raises the overnight lending rate, the demand for that currency rises as investors and traders seek the higher return, thereby strengthening the currency relative to others.

Economic Data – Economic releases are reports that give traders insight into how a country’s economy is performing. Consumer Price Index (inflation data), Non-Farm Payrolls (employment data), Gross Domestic Product (GDP), Retail Sales, Purchasing Managers’ Index (PMI) and others are important economic data that affect currency rates.

Politics – The forex market is subject to instability caused by trade wars, elections, corruption scandals and policy changes. The government has the power to influence the economy. This can increase or decrease the relative value of a currency.

Volatility – Traders typically take smaller bets on currencies with higher volatility and larger bets on currencies with lower volatility. Each of these pairs may become volatile at anytime as a result of a sudden interest rate move, a dramatic shift in the economic outlook, or political unrest. It is important to follow these market pages above for up to date news and analysis.