A currency pair is a quotation for two different currencies. It is the amount you would pay in one currency for a unit of another currency. For instance, when a trader is quoted EUR/USD 1.13 it means that the trader can exchange 1 Euro and receive 1.13 US Dollars.
When a currency’s value changes, it changes relative to another currency. If the EUR/USD quotation goes from 1.13 today to 1.15 tomorrow it means that the Euro has appreciated relative to the US dollar, or that the US dollar has depreciated relative to the Euro because it will cost more US dollars to purchase 1 Euro.
WHAT ARE THE MAJOR CURRENCY PAIRS?
The definition of ‘major currency pairs will differ among traders, but most will include the four most popular pairs to trade – EUR/USD, USD/JPY, GBP/USD and USD/CHF. ‘Commodity currencies’ and ‘cross pairs’ are also categorized as majors. Below we explore the major currency pair categories.
Major currency pairs
The most traded currency pairs are listed below. They represent some of the world’s largest economies and are traded in high volumes. Higher volumes tend to lead to smaller spreads.
- EUR/USD – Euro Dollar
- USD/JPY – Dollar Yen
- GBP/USD – Pound Dollar
- USD/CHF – Dollar Swiss Franc
The EUR/USD (Euro/US Dollar) nicknamed ‘Fiber’ is the world’s most traded currency pair commanding 23% of FX transactions in 2016. The Euro and the US Dollar represent the two largest economies in the world, the US Economy and the European Union.
The popularity of the EUR/USD ensures that it trades at tight spreads. High volumes lead to reduced price differences between the bid and offer.
Commodity currencies like the Aussie, Loonie and Kiwi are forex pairs that are greatly influenced by commodity prices.AUD/USDUSD/CADNZD/USD
The AUD/USD (Australian Dollar/US Dollar), or ‘Aussie’, is greatly affected by mining commodities, farming of beef, wool and wheat. The Aussie also tends to do well when China does well because the two countries are big trading partners. The Reserve Bank of Australia (RBA) also has major influence over the AUD/USD.
Cross currency pairs do not include the US Dollar. Historically, currencies had to be exchanged into US dollars before they could be exchanged into other currencies. The popular cross pairs are the EUR/GBP, EUR/JPY and the EUR/CHF.EUR/GBPEUR/JPYEUR/CHF
This cross pair explores the relationship between the UK economy and the European Union. Forecasting the EUR/GBP can be difficult because the economies are interlinked.
WHAT AFFECTS THE RATES OF MAJOR CURRENCY PAIRS?
The main fundamentals that affect currency pairs are changes in overnight interest rates by central banks, economic data and politics.
Interest Rates – Central banks have it in their mandate to maintain monetary and financial stability. They do this by influencing interest rates. When a central bank increases its overnight interest rate it causes increased demand for that currency because investors and traders seek the higher yield which in turn appreciates the currency relative to other currencies.
Economic Data – Economic releases are reports that give traders a glimpse into the performance of a nation’s economy. Important economic data that influences currency rates include CPI (inflation) data, Nonfarm payrolls (employment data), gross domestic product (GDP), retails sales, purchasing managers index (PMI) and others.
Politics – Trade wars, elections, corruption scandals and changes in policies introduce instability which reflects in the forex market. The government has the power to affect the economy which can boost or depreciate a currency’s relative value.
Volatility – Traders usually take smaller positions on the more volatile currencies and bigger positions on less volatile positions. Volatility can strike any of these pairs at any time due to abrupt changes in interest rates, drastic changes to the economic outlook, or political instability. It is important to follow these markets dedicated pages above for up to date news and analysis.
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