• English
  • 简体中文
  • 繁體中文
  • Tiếng Việt
  • ไทย
  • Indonesia
Subscribe

Major currency pairs explained

Raman Saini

Dec 14, 2021 14:45

The major currency pairs are a few of the most popular currency combinations in the forex market. Prices in these pairs frequently move in tighter bands, however their movements can still be unstable. Find out about the major forex sets here.

What are the major forex pairs?

Opinions vary a little over a definitive list of major currencies, but a lot of will include the conventional '4 majors'-- EUR/USD, USD/JPY, GBP/USD and USD/CHF -- along with the three most-traded 'commodity currencies' versus the US dollar, which are AUD/USD, USD/CAD and NZD/USD.

 

While the majority of lists only consist of these seven majors, some traders would also consist of essential currency pairings which don't feature the US dollar at all-- otherwise called 'cross currencies'-- in their list of major currencies. Some of the most traded of these are the GBP/EUR, EUR/CHF and EUR/JPY.

The 4 conventional majors

Below is a profile on each of the 4 traditional major currencies, along with what affects their price motions. It deserves discussing, that the most popular currency pairs in terms of trading volume are not always thought about majors. Rather, the four majors are the more generally popular currency sets on the marketplace. As an example, AUD/USD is presently the 4th most traded currency pair on the planet, however it is not counted among the 4 standard majors.


The four conventional majors are:

  • EUR/USD

  • USD/JPY

  • GBP/USD 

  • USD/CHF

Trading EUR/USD

EUR/USD is the most traded forex pair in the world. It holds the euro as the base currency and the United States dollar as the quote currency, so the price represents the number of dollars you would require to invest in order to purchase one euro. For instance, if the estimate for EUR/USD was 1.2500, you would need to invest $1.25 in order to purchase EUR1.

 

The popularity of EUR/USD as a currency pair suggests that it is highly liquid and that brokers often use tight spreads. Equally, it tends to be less unpredictable than other currency pairs because the US dollar and the euro are backed by the world's 2 biggest economies.

 

image.png


However, this does not suggest that there is no volatility in this pair-- and there is still an opportunity for traders to recognize an earnings. This is especially true with the uncertainty surrounding Brexit and the continuous US-China trade war affecting the worth of the euro and the United States dollar respectively. Volatility in the EUR/USD pair is highlighted by the above price chart.

Trading USD/JPY 

The first thing that many traders will see about USD/JPY is that the worth of a single pip is much larger than that of the majority of other currencies-- frequently just being priced estimate to 2 decimal locations. This is true for any currency pair in which the yen looks like the quote currency, and it takes place because of the reasonably low value of the yen against the dollar.

 

The yen's low worth relative to the dollar is due in part to the quantitative easing and low rates of interest policies of the Bank of Japan. The low interest rates are an effort by the Bank of Japan to fight low inflation and sluggish growth, which has actually led to near-zero and even unfavorable interest rates in Japan at many points in the last 20 years.

 

image.png


The yen is frequently used as one half of a bring trade, which is where a trader obtains cash in a country that has low rate of interest and purchases a country that has higher ones. In addition, the yen is extensively acknowledged as a 'safe haven', which can see it increase in times of economic unpredictability. This also leads the value of the USD/JPY pair to be correlated with the USD/CHF pair-- since CHF is likewise seen as a safe haven, which is explained in section four.

Trading GBP/USD

GBP/USD has the pound as the base currency and the US dollar as the quote currency, implying it shows how many dollars you would need to spend in order to purchase one pound. GBP/USD is colloquially called 'cable television' on account of the deep-sea cable televisions that used to move price details between London and New York.

 

Typically speaking, 14:00 (UK time) is when liquidity is most concentrated in this pair, due in part to the fact that this is the time which sees one of the most overlap in activity for traders in both London and New York.

Trading USD/CHF

The presence of the Swiss franc among the top four currencies can look a little odd in the beginning glimpse. Switzerland isn't a major global economy-- unlike America, Europe, Japan or the UK.

 

But--comparable to the yen--the Swiss franc owes much of its popularity to its status as a safe-haven financial investment. This has actually made the franc a popular currency in times of financial unpredictability or market chaos, as traders look for markets that are perceived as lower danger-- similar to the USD/JPY pair.

 

Switzerland's long-held track record for financial stability, safety and neutrality ensures that its reputation as a safe house is all but strengthened. Equally, when market volatility is low, the Swiss franc will generally tend to follow the market motions of the euro, due to the close economic relationship that Switzerland has with the eurozone.

Commodity currencies 

Commodity currencies are private currencies or forex pairs in which the price is identified mostly by the worth of a certain commodity on which that currency's economy is heavily reliant. The 3 commodity currencies that most traders will consist of on a list of the 'majors' are:

  • AUD/USD 

  • USD/CAD

  • NZD/USD

Trading AUD/USD 

If you wish to start trading AUD/USD, it is very important to keep an eye on the worth of coal and iron ore on the products market, as well as the value of other metals such as copper. This is because any variation in the worth of these products will likely trigger a reciprocal fluctuation in the value of the Australian dollar relative to the US dollar.

 

Similarly, just like other commodity currencies, the value of the United States dollar considerably impacts the rates of the AUD/USD pair. This is because a stronger United States dollar typically implies that Australian exports will be less expensive, which can lower the value of the Australian dollar and suggests that Australian producers get less money for their produce.

Trading USD/CAD

The value of the Canadian dollar is mostly connected to the price of oil due to the fact that oil is Canada's main export. As a result, if the price of oil changes-- maybe because of a change in the Organization of the Petroleum Exporting Countries (OPEC) production quotas-- then the price of the Canadian dollar will likely be impacted.

 

If the supply of oil was increased by OPEC, oil's price would likely fall which, in turn, would bring down the worth of the Canadian dollar. Equally, since oil is priced in United States dollars, any fall in the value of oil will likely see a reciprocal fortifying of the United States dollar.

 

Much like with the AUD/USD pair, this suggests that Canadian oil exporters will receive less cash for their produce.

Trading NZD/USD

The last product currency which appears on most major currency lists is the NZD/USD pair. This is the New Zealand dollar versus the US dollar-- otherwise known as the 'kiwi'. Farming-- along with global trade and tourism-- is crucial to the New Zealand economy, so the price movements of soft commodities will typically play out on NZD/USD.

 

As with all currency sets, the role of each country's reserve bank should not be undervalued. In this case, the Reserve Bank of New Zealand sets rates of interest that can have a major effect on NZD/USD, especially when they don't line up with what the Fed is doing.

 

As a result, traders must keep themselves informed on the different monetary policies of both reserve banks prior to opening a position on the NZD/USD pair.

Cross currencies

Cross currency sets are those which do not consist of the United States dollar. Some traders will not include these pairs in a collection of major currencies. However, for this short article we will briefly check out a few of the cross currencies which are sometimes consisted of as majors. Examples of highly-traded cross currency sets consist of:

  • GBP/EUR

  • EUR/CHF

  • EUR/JPY

 

These 3 are the cross currency couple with the most liquidity because they all contain a different combination of the standard majors.

Trading GBP/EUR

GBP/EUR is a key currency pair that explores the relationship in between the British pound and the euro. GBP/EUR has been particularly volatile since the UK voted to leave the European Union (EU) on June 23, 2016.

 

The label for this pair is 'chunnel', representing the connection in between Britain and Europe via the Channel Tunnel which runs from Dover to Calais. GBP/EUR will likely offer numerous opportunities to realize a profit by going both long and short up until Brexit is completed and a withdrawal agreement is reached.


image.png

Trading EUR/CHF

Comparable to GBP/EUR or USD/CAD, EUR/CHF sees 2 closely-tied economies pitted against each other-- the Swiss economy against and the eurozone. Like other CHF pairs in this short article, EUR/CHF can be viewed as a relatively stable pair due to Switzerland's safe haven status.

 

An example of the franc's stability in relation to the euro can be seen throughout the European debt crisis of 2008-- after which the franc reinforced as financiers relied on it as a safeguard for their capital.

 

For 4 years after 2011, the value of the franc was pegged to the euro by the Swiss National Bank. Contemporarily, the franc operates under a drifting exchange rate-- but this has actually not affected its track record as one of the most steady currencies on the marketplace.

Trading EUR/JPY

As the world's second most significant currency, the euro is another key pairing with the Japanese yen. It is heavily affected by the volume of JPY carry trades, along with market belief.

 

image.png


Liquidity in the EUR/JPY pair is often focused between 8:00 and 15:00 (UK time). EUR/JPY is not as volatile as a few of the other sets on this list, but it still provides ample room for a trader to understand an earnings.

What impacts the price of forex sets?

There are a number of elements which affect the price motions of every forex pair. These include rate of interest, geopolitical instability, the strength of their country's economy and the level of foreign direct financial investment (FDI) in the domestic market.

 

Rate of interest are controlled by the financial policy of that currency's particular central bank. For example, if the Federal Reserve (Fed) raises rates of interest, it will normally trigger the US dollar to enhance against the euro, triggering the price of EUR/USD to drop.

 

This is since financiers will tend to favor countries with greater rate of interest than those with lower rate of interest when they are deciding where to save their money. This is since with higher interest rates, an investor will get a higher return for their preliminary capital.

 

Geopolitical instability could indicate that financiers and traders lose self-confidence in a nation's capability to govern or expect that there will be hard times ahead for the economy which may imply that the currency stagnates or becomes too unstable to trade.

 

Trading a volatile market all depends upon an individual trader's hunger for risk, with some traders preferring markets with regular movements as an opportunity to realize a quick revenue.

 

Luckily with the majors, such motions are less regular-- although political occasions like Brexit can still affect the price of sterling and euro currency sets.

 

FDI can affect the price of a currency pair since an increase in FDI is indicative of higher financier self-confidence in that country's economy and facilities. This, in turn, can increase need for that country's currency, which will cause the price to rise.

 

For example, if there was a considerable boost in FDI in the American economy, it would be expected that the value of the United States dollar would enhance relative to other currencies that it is paired with.

 

The strength of a nation's economy and the level of FDI are frequently directly correlated.

How to trade the major forex pairs

  • Research which forex pair you want to trade

  • Carry out analysis on that forex pair, both technical and basic

  • Select a forex trading strategy and inspect you're comfy with your exposure to risk

  • Produce an account and deposit funds

  • Open, display and close your first position