Major currency pairs on the Forex market
The Forex market is where all currencies are traded. However, the volume of trade in different currencies is very different.
Therefore, although there are hundreds of currencies in the world, about two-thirds of the incredible $4 trillion in foreign exchange volume is transacted in just 4 currency pairs!
These four pairs are called major currencies. The movement in these pairs is the most watched metric in the forex market and is considered a general measure of the market.
So when currency experts talk about the rise or fall of the forex market in general, these pairs are mentioned. In this article, we will take a closer look at four major currency pairs.
The EUR/USD currency pair is the most traded currency pair in the world. Almost every leading bank in the world has traders who trade exclusively in EUR/USD.
And although the euro was only recently introduced as a currency, it has gained prominence and become part of the most traded currency pairs in the world.
It is important to understand that in the EUR/USD pair, the euro is the base currency. This means that all contracts related to EUR/USD are denominated in EUR.
This can be compared to the fact that price movements as well as profit and loss accounts are denominated in US dollars.
Also, since USD is a widely accepted and liquid currency between them, all margin payments are usually requested in USD!
Trading this currency pair has many advantages. One such advantage is the fact that the spreads are the lowest in this pair.
This means that there are minimal transaction costs when trading currencies, if you trade the EUR/USD pair.
This lower spread can be attributed to the fact that EUR/USD is the most liquid currency pair in the world and there are many traders and market makers who always provide quotes for this pair.
US Dollar / Swiss Franc:
The Swiss franc is considered a safe currency. Thus, the value of the USD/CHF pair declines when the world considers the US dollar a safe investment.
However, when the dollar appears to be in danger, investors want to invest in the Swiss franc. However, it should be noted that the value of this pair largely depends on the inflow of capital into the Swiss banking system, which is known worldwide for its secrecy!
Also, Switzerland’s reputation as a stable country with sound economic fundamentals contributes to the Swiss franc’s reputation as a safe haven among currencies.
Therefore, it is common knowledge in the currency trading market that traders are interested in any news that affects the performance of this pair as it is characterized by high liquidity due to the size of the economies of the two countries.
US Dollar / Japanese Yen:
The Japanese yen, after the US dollar and the euro, is the third most traded currency in the world. As such, the USD/JPY pair is of utmost importance.
According to some estimates, this currency pair alone accounts for about 20% of the world’s Forex trade.
Also, whoever wants to trade currencies must understand that USD/JPY is a very volatile currency pair.
It is known for being bound to a range for a long time and then showing sudden fluctuations as it moves to a new equilibrium at a different price level.
This currency pair shows maximum sensitivity to changes in the US interest rate. This is because the Japanese government holds a huge amount of US debt and any yield changes seriously affect the Japanese government’s cash flow.
In this case, the US dollar is the base currency. Therefore, all contracts related to USD/JPY are denominated in USD.
However, price movements as well as profit and loss accounts are denominated in Japanese yen.
Again, since the US dollar has unparalleled liquidity, margins are always charged in US dollars.
British Pound / US Dollar:
The British economy is one of the most important in the world, and the trade relationship between the British pound and the US dollar is extremely important.
This pair is considered one of the oldest currency pairs traded on the Forex market. As such it is nicknamed the “Pound Sterling”.
The British pound has a huge trading volume, and the GBP/USD pair accounts for about 8% of the trading volume in the forex markets.
This currency pair is very sensitive to news related to the US dollar. Also, it is important to note that this pair has a positive correlation with the EUR/USD pair.
And if EUR/USD moves 5% in a certain direction, GBP/USD will move 8% in the same direction. Meanwhile, there is a negative correlation between GBP/USD and USD/CHF.