When it comes to foreign exchange trading, currency pairs are an extremely important factor in determining the dynamics of the market. With daily trading volumes that exceed $7.5 trillion, the foreign exchange market, also known as the forex market, is the economic market that is both the largest and most liquid internationally. The market is dominated by a select few currency pairs due to their liquidity, stability, and economic significance. These currency pairs are among the numerous currency pairs that are available for trading. The major currency pairs are represented by these two pairs.
Having a solid understanding of the major currency pairs is absolutely necessary for any trader, investor, or financial analyst who wishes to successfully navigate the foreign exchange market. In the following paragraphs, we will discuss the major currency pairs, including their characteristics, the economic influences that they have, and the benefits that come with trading them.
What Are Major Currency Pairs?
There are two different currencies that make up a currency pair. One of the currencies is being purchased, and the other is being sold. Those currency pairs that include the United States dollar (USD) on one side and a highly traded counterpart on the other side are considered to be the major currency pairs. These pairs are the most liquid and widely traded, which makes them less volatile and more predictable than minor or exotic pairs since they are traded more frequently.
The Major Currency Pairs:
- EUR/USD (Euro / US Dollar)
- GBP/USD (British Pound / US Dollar)
- USD/JPY (US Dollar / Japanese Yen)
- USD/CHF (US Dollar / Swiss Franc)
- AUD/USD (Australian Dollar / US Dollar)
- USD/CAD (US Dollar / Canadian Dollar)
- NZD/USD (New Zealand Dollar / US Dollar)
Each of these pairs represents significant economies and attracts high trading volumes. Let’s take a closer look at each one.
Breakdown of Each Major Currency Pair
1. EUR/USD: The Most Traded Pair
- Currency Symbols: EUR (Euro) and USD (US Dollar)
- Nicknames: “Fiber”
- Market Influence: European Central Bank (ECB) and Federal Reserve (Fed)
- Average Daily Volume: Highest among all forex pairs
- Volatility: Moderate
Why Trade EUR/USD?
- Lowest spread among all forex pairs
- High liquidity leads to better price stability
- Influenced by Eurozone economic performance and US monetary policy
- Suitable for beginners due to predictable price movements
2. GBP/USD: The “Cable”
- Currency Symbols: GBP (British Pound) and USD (US Dollar)
- Nickname: “Cable”
- Market Influence: Bank of England (BoE) and Fed
- Volatility: High
Why Trade GBP/USD?
- Higher volatility presents opportunities for larger profits
- Strong correlation with economic and political events in the UK
- Popular among short-term traders
3. USD/JPY: The Safe-Haven Pair
- Currency Symbols: USD (US Dollar) and JPY (Japanese Yen)
- Nickname: “Gopher”
- Market Influence: Bank of Japan (BoJ) and Fed
- Volatility: Low to Moderate
Why Trade USD/JPY?
- Japanese yen acts as a safe-haven currency, making this pair crucial during economic uncertainties
- BoJ often intervenes in forex markets, creating significant movements
- A favorite for traders using carry trades due to Japan’s low interest rates
4. USD/CHF: The “Swissie”
- Currency Symbols: USD (US Dollar) and CHF (Swiss Franc)
- Nickname: “Swissie”
- Market Influence: Swiss National Bank (SNB) and Fed
- Volatility: Low
Why Trade USD/CHF?
- Swiss Franc is a safe-haven currency, meaning the pair reacts strongly to global instability
- Generally moves in the opposite direction to EUR/USD
- Stable and predictable movements make it suitable for conservative traders
5. AUD/USD: The Commodity Pair
- Currency Symbols: AUD (Australian Dollar) and USD (US Dollar)
- Nickname: “Aussie”
- Market Influence: Reserve Bank of Australia (RBA) and Fed
- Volatility: Moderate to High
Why Trade AUD/USD?
- Strongly influenced by commodity prices, particularly gold and iron ore
- High-interest rates in Australia make it attractive for carry trades
- Provides diversification for traders focused on commodity-driven economies
6. USD/CAD: The “Loonie”
- Currency Symbols: USD (US Dollar) and CAD (Canadian Dollar)
- Nickname: “Loonie”
- Market Influence: Bank of Canada (BoC) and Fed
- Volatility: Moderate
Why Trade USD/CAD?
- Heavily impacted by oil prices due to Canada’s significant crude oil exports
- Generally follows trends rather than short-term fluctuations
- Popular among traders with interests in the energy sector
7. NZD/USD: The “Kiwi”
- Currency Symbols: NZD (New Zealand Dollar) and USD (US Dollar)
- Nickname: “Kiwi”
- Market Influence: Reserve Bank of New Zealand (RBNZ) and Fed
- Volatility: Moderate
Why Trade NZD/USD?
- Smaller economy means less overall liquidity but higher price swings
- Correlated with agricultural commodities and dairy exports
- Influenced by interest rate differentials, making it attractive for carry trades
Key Factors Influencing Major Currency Pairs
1. Interest Rates
Interest rates are under the control of central banks, which exert an influence on the demand for currencies. Generally speaking, higher interest rates are beneficial to a currency because investors are looking for better returns.
2. Economic Indicators
There is a significant potential for currency values to be influenced by reports such as the growth of the GDP, inflation, employment data, and trade balances.
3. Political Events
Volatility in foreign exchange markets can be caused by a variety of factors, including elections, trade agreements, geopolitical conflicts, and policy changes.
4. Market Sentiment
Price movements are influenced by both the psychology of traders and their appetite for risk, as well as by external shocks such as pandemics and financial crises.
5. Commodity Prices
There is a strong correlation between commodities such as oil, gold, and agricultural goods and currencies such as the Australian dollar, Canadian dollar, and New Zealand dollar.
Advantages of Trading Major Currency Pairs
- High Liquidity: Ensures tighter spreads and lower trading costs
- Better Price Stability: Reduces unexpected slippage
- Predictable Market Trends: Easier to analyze using technical and fundamental strategies
- High Trading Volume: Ensures orders are filled quickly
- Availability of Information: Regular economic reports and news coverage
Conclusion
In order to maximize profits and effectively manage risks, foreign exchange traders absolutely need to have a solid understanding of the major currency pairs of the market. A variety of factors, including economic policies, commodity prices, and market sentiment, contribute to the distinctive qualities of each unique pair. It is possible for traders to make more strategic decisions in the foreign exchange market if they maintain a level of awareness regarding economic indicators and global events.
When it comes to trading, concentrating on major currency pairs offers the best opportunities for stable and profitable trading, regardless of whether you are a novice or an experienced commercial trader. Maintaining a competitive advantage in the ever-changing foreign exchange market requires keeping a close eye on decisions regarding interest rates, political developments, and economic reports.
When it comes to trading the major currency pairs, are you prepared? You should immediately begin analyzing these markets and working to improve your trading strategy.
