Introducing the four ‘major’ currency pairs
Although there is no official list of the major forex currency pairs in the market, it is roundly accepted that the following four pairs are the most popular and liquid in forex trading. All four include the US dollar, which is no surprise given the greenback’s influential role in the global economy.
EUR/USD
The EUR/USD, also known as the Euro Dollar, is the pair covering the currencies of the European Union and the United States of America. The Euro acts as the base currency and the US dollar acts as the quote currency. If you’re unfamiliar with how base and quote currencies work, the quote currency states how much is required to buy one unit of the base currency.
One of the key differentiators between the value of the Euro and the US dollar is their respective interest rates. The rates set by the European Central Bank (ECB) and the Federal Reserve can play an influential role. Meanwhile, any issues affecting EU nations, such as the past debt crises in Italy and Greece, did much to destabilise and weaken the EUR/USD, with the dollar strengthening fast against the Euro. The EUR/USD is the most traded of all forex pairs in the world. That’s largely because it is the two biggest western economies trading against one another.
GBP/USD
The GBP/USD currency pair brings together the British pound and the US dollar. Before World War I, the pound was the most valuable currency in the world. More than three-fifths of the world’s debt was stored in sterling. However, the US dollar rapidly took over post World War II and the emergence of the Bretton-Woods monetary framework – which fixed the value of the greenback to the price of gold – saw the USD surge. Although it the US dropped the so-called gold standard in 1971, it remains the most influential currency in the present day.
One of the key factors in the GBP/USD in recent years has been the UK’s Brexit vote to leave the European Union. With huge uncertainty surrounding the trading relationship between the UK and EU following the referendum, the price of the GBP/USD plunged by 8% in a single day – the highest 24-hour move since the end of the Bretton-Woods framework in 1971.
USD/JPY
The USD/JPY, also known as the Dollar-Yen, is another major currency pair in the forex market. It measures how many Japanese yen are required to purchase one US dollar.
Think of the Dollar-Yen as the forex link between the western and eastern worlds. Both the US and Japanese economies are considered some of the most risk-averse in the world, which means the Dollar-Yen can lag some of the other major currency pairs in terms of price volatility. However, this makes it a suitable starting point for entry-level forex investors.
USD/CHF
The USD/CHF is commonly nicknamed the ‘Swissie’ by experienced forex investors. That’s because it pairs the US dollar with the Swiss franc. Like the US dollar, the Swiss franc is a currency with plenty of history and tradition dating back to the 18th century. For many years, the Swiss franc has been considered a relative safe-haven currency to invest in compared with other more volatile options. This is largely since at least 40% of its currency is backed by gold reserves.
One of the interesting observations of the ‘Swissie’ is its market movements, which typically mimic major geopolitical news. In times of difficulty, such as the Great Recession of 2008, investors would have dived into the franc to preserve their funds from the volatility in the US economy. Switzerland is also heavily intertwined with the European Union, both culturally and economically. Therefore, any negative news surrounding the outlook for the bloc can have a negative effect on the ‘Swissie’.
The most popular cross-currency pairs
There are a handful more forex pairs that are considered ‘major’ that don’t include the US dollar. These are known as cross-currency pairs. We’ll briefly explore the most highly traded cross-currency forex pairs to give you some inspiration if you’d rather avoid trading pairs involving USD. Cross-currency pairs, also known as minor currency pairs, typically include either the euro, the British pound or the Japanese yen.
EUR/CAD
With the Euro being the second most traded foreign currency after the US dollar and the Canadian dollar the sixth most traded, the EUR/CAD pair still carries plenty of weight even as a cross-currency or ‘minor’ forex pair. The EUR/CAD unsurprisingly dates back to the launch of the Euro in 1999.
Interest rates heavily influence the price direction of the EUR/CAD currency pair. Rates set by the European Central Bank (ECB) can determine the strength or weakness of the EU economy at any given period. The ECB’s monthly reports can provide direction over future policies. Meanwhile, the Canadian economy is heavily influenced by its exports, spanning a range of commodities and raw materials.
EUR/AUD
The EUR/AUD is considered one of the lesser-known cross-currency pairs. Interestingly, this pair is the most heavily influenced by the price of the commodity gold. That’s due largely to Australia’s status as the third-largest producer of gold on the planet. In most cases, if the value and demand in gold declines, so too does the value and demand in AUD.
Additional mitigating factors surrounding the value of the AUD against the euro is the Australian economy’s relationship with neighbouring islands, such as New Zealand. When imports from New Zealand and the Far East ramp up, this is often an indicator of the economy heating up ‘Down Under’.
EUR/JPY
The Euro-Yen cross-currency pair is the seventh most traded forex pair in the market. Its popularity stems from the pair’s regular volatility, with the price action attracting day traders and investors alike. The Meiji government established the Japanese yen in the late 19th century. The expansion of Japan as an industrial powerhouse has enabled the yen to grow into one of the most influential currencies worldwide.
EUR/CHF
The Euro-Swiss Franc pair is one of the most interesting cross-currency pairs to invest and trade in. Although Switzerland is not part of the European Union, it remains a loyal friend and trading partner. However, the franc has long acted as a safe hedge against the economic headwinds experienced in the Eurozone. During the Eurozone’s bailout of Greece’s sovereign debt, the franc soared as forex traders sought a strong and dependable alternative.
EUR/GBP
The EUR/GBP currency pair has caught the news headlines in recent years, given the EU referendum and subsequent Brexit vote. The euro and pound sterling are two of Europe’s most influential currencies, given that the EU and British economies are some of the strongest in the western world. Here, the pound acts as the quote currency here, so the EUR/GBP shows how many pounds are needed to buy one Euro.
Interest rates and GDP data are two key drivers of the EUR/GBP pair, aside from Brexit. If the ECB cuts interest rates in the Eurozone, this usually weakens the EUR/GBP. If the Bank of England cuts interest rates, it mostly strengthens the EUR/GBP. This is because lower interest rates typically go hand-in-hand with reduced demand for a currency in the forex markets.
GBP/JPY
The GBP/JPY, informally known as the ‘Geppy’ among seasoned forex investors, is considered a solid indicator of the health of the global economy. Individually, the pound and yen show the strength of the British and Japanese economies, providing a sense of perspective from west to east.
However, as with the EUR/JPY, the ‘Geppy’ has historically yielded plenty of market volatility. Although this can be fruitful for day traders that seek to take one or multiple positions over short time scales, it’s harder for long-term forex investors to take a position on the GBP/JPY pair.
GBP/CAD
The GBP/CAD pair sees the British pound move to the base currency, with the Canadian dollar acting as the quote currency. The Canadian dollar – and its nation’s economy – is largely aligned with that of the United States. The North American neighbours are long-time trading partners and if the US economy is thriving, the Canadian economy is often not far behind. Essentially, this means the value of the US dollar can often define how the GBP/CAD moves in the market.
It's also worth watching Canadian exports, with commodities such as oil and gold capable of forcing the value of the CAD up or down with good or indifferent yields.
The most popular ‘exotic’ currency pairs
In addition to major and cross-currency pairs, the forex market also contains a string of exotic currency pairs too. These pairs consist of one major, established currency and one currency from a developing economy. The EUR/TRY is one of the most popular exotic pairs, with the euro traded against the Turkish lira. This has become an increasingly intriguing currency pair to trade given the continued speculation surrounding Turkey and its strategic plans to join the European Union bloc.
EUR/TRY
The EUR/TRY is one of the most talked-about exotic currency pairs in the forex market. Pitting the euro against the Turkish new lira, the TRY acts as the quote currency here. There is substantial volatility between the euro and the lira, with much of the speculation surrounding Turkey’s potential accession into the European Union heavily influencing prices.
USD/HKD
The USD/HKD is another popular exotic forex pair, with the greenback up against the Hong Kong dollar as the quote currency. Hong Kong remains one of the most appealing free-market economies on the planet. It’s also a gateway to the Chinese economy, with the HKD usually providing a strong indicator of the value of the Chinese yuan.
NZD/SGD
The NZD/SGD sees the New Zealand dollar pitted against the Singapore dollar. The latter is widely regarded as one of the most stable currencies worldwide. The value of the NZD is intrinsically linked to the success of the nation’s agricultural exports, while the highly developed Singaporean economy is focused more heavily on the IT and financial service sectors.
