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6 Major Forex Pairs to Trade

TABLE OF CONTENTS

6 Major Forex Pairs to Trade

6 Major Forex Pairs to Trade

Vantage Updated Updated Fri, June 30 06:44

What are major forex pairs?  

The most traded forex pairs are known as the “majors” and always contain the US Dollar on one side. This is because the USD is the world’s reserve currency and most dominant in trading volumes, according to the most recent BIS Triennial Central Bank Survey published in April 2022 [1].   

While there are eight major currencies, there are only seven major currency pairs.  The seven ‘majors’, make up 62% of total forex market turnover [2].   

By order of trading volume, the majors are: 

  • EUR/USD 
  • USD/JPY 
  • GBP/USD 
  • USD/CAD 
  • AUD/USD 
  • USD/CHF 
  • NZD/USD 

Cross-currency pairs are the frequently traded currencies that do not include the US Dollar. These are normally less liquid.  

Exotic currency pairs are from emerging and developing economies, paired with one major currency.   For example, USD/CNY (Chinese Renminbi) accounts for 6.6% of forex market turnover according to the latest BIS report [3].  Emerging market currencies make up 13.8% of the total turnover [4].   

Why Traders Trade the Major Pairs 

Major forex pairs are typically highly traded, resulting in smaller differences between buying and selling prices compared to exotic pairs. This is because, when more people are trading, the prices they are willing to buy and sell at get closer. Also, more trading usually means more activity in the market, making the currency more liquid. 

Having a high trading volume also helps trades to easily enter or exit their large trading positions. Moreover, a higher volume implies a greater number of people willing to buy or sell at any given moment, reducing the likelihood of slippage, or minimising its impact if it does happen. Although significant slippage can still occur in major pairs, it is considerably less common compared to thinly traded exotic pairs. 

What Affects Forex Currency Pairs?  

Here are a few factors that can affect the price movement of forex currency pairs: 

1. Interest Rates 

Global central banks play a crucial role in setting interest rates, which in turn determine the value of a country’s currency. When a country raises its interest rates, it tends to attract more foreign investors, leading to increased demand for and appreciation of the country’s currency.  

Conversely, a decrease in interest rates can result in a depreciation of the country’s currency value. Traders closely monitor central bank announcements and monetary policy meetings to predict future market movements. 

2. Geopolitical Stability 

Geopolitical stability will also influence the country’s currency value. Wars, civil unrest, and even diplomatic relations with other countries can create volatility. Countries seen as stable usually attract more foreign investment, which boosts their currency. When investors feel a country is safe and politically sound, they’re more likely to invest, believing their money will be protected. 

3. Trade Data 

Trade data typically refers to the balance of trade between two countries, i.e., the difference between the value of exports and imports. A country that exports more than it imports will likely see an appreciation in its currency. This is because foreign customers buying a country’s exports will need to convert their currency, increasing demand for the nation’s currency. 

4. Government Factors 

Beyond geopolitics, government policies and stability play a role. Economic policies, such as fiscal policies (related to government spending and taxation) and monetary policies (related to the control of the money supply by central banks), can affect the value of a currency. Moreover, government debt and political stability can also impact investors’ perception and confidence in the country’s currency. 

Trading the major currency pairs  

Three key reasons to consider when trading the majors are:  

  1. Liquidity – This means there is abundant liquidity and a very high level of activity in their markets. This enables traders to enter and exit their positions with ease, even when volatility is high.  
  2. Low spreads – High liquidity and high volumes generally result in lower spreads. This may be beneficial to all traders seeking to keep costs to a minimum as the bid-ask spreads tend to be narrow.   
  3. Less slippage – Great volume means traders are constantly buying and selling the majors. This can result in less chance of slippage or at least smaller slippage when it does occur. Slippage, when the execution price is different to the requested price, can be an issue in less liquid markets.    

1. EUR/USD  

EUR/USD accounts for nearly one in four forex transactions [5]. This means it has the largest global trading volume and is one of the most popular currency pairs in the world. This outstanding liquidity means traders enjoy consistently low spreads.  

By combining two of the three biggest economies, the major is an excellent measure of the overall health of the global economy. Prices in EUR/USD constantly reflect the latest economic and fundamental data, as well as the central bank policies of the US Federal Reserve and the European Central Bank (ECB).   

The ECB currently holds eight meetings per year (approximately every six weeks) with the initial policy announcement at 13:45 CET and a press conference at 14:30 CET. The bank also releases new staff macroeconomics forecasts at these meetings on a quarterly basis.   

2. USD/JPY  

This is the second most traded currency major, and it represents a major quantity of daily trading [6]. The yen is often seen as a “safe haven” currency and investors will buy the yen when volatility picks up and risk sentiment turns sour [7]. JPY is also used by carry traders who borrow the yen and invest it in higher-yielding currencies.   

The Bank of Japan meets eight times a year and at four of these meetings (January, April, July and October), the bank also publishes the Outlook for Economic Activity and Prices which are its latest forecasts.   

The bank has been battling with stubbornly low inflation for decades. This has resulted in ultra-easy accommodative monetary policy with very low interest rates.   

3. GBP/USD  

The UK is the world’s fifth biggest economy and is currently just holding off a rising India. Before World War One, the pound was the largest currency in the world with over 60% of global debt being held in sterling [8].   

This major often goes by the moniker of “cable”, which originated in the mid-19th century when undersea copper cables were used to transmit the bid and ask quotes across the Atlantic.   

GBP/USD is heavily traded and shares similar characteristics with EUR/USD. Both are correlated due to the economies being interlinked, though Brexit has meant a rethink in terms of previous ties.   

The Bank of England usually meets every six weeks to decide on monetary policy which it does through the nine-person committee, the MPC. Political upheaval in the UK in recent years has also lent itself to volatility and some explosive trends. High liquidity and tight spreads make cable attractive to trade.  

4. USD/CAD  

The Canadian dollar, also known as the “loonie” is one of the commodity dollar currencies. The Canadian economy is a major exporter of raw materials and commodities which means the CAD is driven by external factors in the global economy.   

The currency is often closely correlated to crude oil prices and direction. It can also have a strong relationship with the US stock market benchmark, the S&P 500, and the global risk sentiment.  

The Bank of Canada carries out monetary policy by adjusting short-term interest rates. It meets on eight fixed dates each year, typically on a Wednesday.    

5. AUD/USD  

This is a popular forex pair with the “Aussie” also regarded as a commodity dollar currency. Notably, it is not among the six pairings that make up part of the widely followed US Dollar Index.   

The Australian economy is heavily skewed towards raw materials and commodities, including iron ore and coal. That means the prices of these commodities are a key driver of AUD. Australia’s biggest export market is China, hence Chinese policies and Sino-Australian trade relations are important factors in price action.   

Monetary policy in Australia is decided by the Reserve Bank of Australia (RBA) which normally meets eleven times each year, on the first Tuesday of each month except in January.   

6. USD/CHF  

The history of the Swiss Franc goes way back to the 1700s. Its relatively small economy is a leading force for financial security and privacy, partly due to the political neutrality of Switzerland.   

The “Swissie” is generally regarded as a safe-haven currency and will attract buyers in times of high uncertainty. Historically, the country has enjoyed very little inflation.  

The Swiss National Bank (SNB) looks after monetary policy decisions and conducts in-depth policy assessments in March, June, September, and December. The CHF is heavily backed by large reserves of gold, bonds and financial assets which help the SNB ensure its stability during times of volatility. 

Reference

  1. “OTC foreign exchange turnover in April 2022 – BIS”. https://www.bis.org/statistics/rpfx22_fx.htm . Accessed 29 May 2023  
  2. “OTC foreign exchange turnover in April 2022 – BIS”. https://www.bis.org/statistics/rpfx22_fx.htm . Accessed 29 May 2023  
  3. “OTC foreign exchange turnover in April 2022 – BIS”. https://www.bis.org/statistics/rpfx22_fx.htm . Accessed 29 May 2023  
  4. “OTC foreign exchange turnover in April 2022 – BIS”. https://www.bis.org/statistics/rpfx22_fx.htm . Accessed 29 May 2023  
  5. “Major Pairs: Definition in Forex Trading and How to Trade – Investopedia”. https://www.investopedia.com/terms/forex/m/majors.asp . Accessed 29 May 2023    
  6. “What Are The Most Traded Currency Pairs in Forex? – TraderMade”. https://tradermade.com/blog/what-are-the-most-traded-currency-pairs-in-forex . Accessed 30 May 2023  
  7. “Exploring the Japanese yen – a ‘safe haven’ currency? – Hargreaves Lansdown”. https://www.hl.co.uk/news/articles/exploring-the-japanese-yen-a-safe-haven-currency . Accessed 30 May 2023  
  8. “Why the British Pound Is Stronger Than the U.S. Dollar”. https://www.investopedia.com/ask/answers/070516/why-british-pound-stronger-us-dollar.asp . Accessed 29 May 2023  
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