How to Trade Major Currency Pairs

The major currency pairs traded by forex traders around the world are the following: EUR/USD, GBP/USD, USD/JPY, USD/CHF, USD/CAD, AUD/USD, NZD/USD. In this article we will look at the major currency pairs and examine what influences their price movements. Forex trading is based on exchanging one currency for another and generally, all currencies are traded in pairs. A currency pair is a quotation for two currencies. For example, in the pair EUR/USD, the first currency is the Euro and the second is the US dollar.

The first currency is known as the base currency and the second currency is the quote currency. So, if a trader sees the quote for the EUR/USD is $1.31, this means that the pair is trading at $1.31, and that they can sell 1 Euro and buy $1.13 US dollars.

Similarly, when a currency’s value changes, it always changes in relation to another currency. If the GBP/USD quotation moves from 1.23 to 1.37, then this means that the pound has appreciated or risen against the US dollar, or that the US dollar has depreciated in relation to the pound, as it will cost more dollars to buy 1 pound.

Major Currency Pairs

The four most popular traded pairs are the EUR/USD, USD/JPY, GBP/USD and USD/CHF. These are traded in high volumes and represent the world’s largest economies. Forex traders prefer to trade currencies such as these, as higher volumes usually mean tighter spreads. Apart from these four pairs, there are also “commodity currencies” and “cross pairs”.

A commodity currency is a currency that is influenced from changes in the price of primary commodities. This means that the country of that currency depends on the export of raw materials for income. Australia, New Zealand, Brazil, South Africa, and Russia have commodity currencies as their economy depends on commodity exports such as copper, iron ore and coal, oil and gas, precious metals, and dairy products.

The top three, most traded commodity currencies are the Canadian dollar, the Australian dollar, and the New Zealand dollar. The Japanese yen is also considered a commodity currency as it is influenced by oil prices due to its reliance on imported oil. In the olden days, when someone wanted to exchange currencies, they would first have to convert them into US dollars, as the US dollar was the “vehicle currency” or medium of exchange for international transactions.

So, if you had pounds and wanted yen, you had to first convert them into dollars and then convert your dollars into yen. With the creation of “currency crosses,” it is now possible to convert your currency directly into your desired one. Cross pairs are the following: GBP/JPY, EUR/JPY, EUR/CHF, and EUR/GBP.

What Influences Currency Pairs?

Currency pairs are influenced by geopolitical events, central banks’ interest rate decisions and macroeconomic data. For example, the Federal Reserve, the Central banks of the US, maintains financial stability by increasing or decreasing the discount rate. The Fed sets target interest rates at which banks lend to each other overnight, but it also sets the discount rate, the interest rate at which banks can borrow from the central bank.

If the Fed raises interest rates, it increases the cost of borrowing, to slow down the economy. On the contrary, in order to stimulate the economy, the Fed lowers rates, making borrowing cheaper, and encouraging spending on credit and investment.

Economic releases such as major economies’ CPI (inflation) data, Nonfarm payrolls (employment data in the US), gross domestic product (GDP), retails sales, purchasing managers index (PMI) and others can influence the value of a currency and create volatility. Politics – Trade wars, elections, corruption scandals and changes in policies can create political tensions which can influence the forex market. For example, Brexit and British or American elections have been major events in recent years which have affected both the political and financial spheres.

Traders who are new to forex trading tend to choose liquid currency pairs like the EUR/USD or the USD/JPY. They also spend a significant time on researching and learning the forex market and the currency pairs they are interested in by analysing technical charts and monitoring economic data. Choosing the right forex trading strategy, cultivating discipline and eliminating emotion are also important. Depending on your schedule and lifestyle, you can also choose the right time to trade which will also determine your trading: you can choose from swing-trading, day-trading or scalping.