Understanding Major Currency Pairs in Forex Trading

The vast forex market sees trillions of dollars change hands each business day. Trading forex successfully means understanding the dynamics of the major currency pairs that form the cornerstone of global financial markets and the backbone of international trade and investment. 

Whether you are an aspiring currency trader or an experienced investor in foreign markets, grasping the intricacies of these major currency pairs is essential for navigating the ever-shifting tides of the forex market. 

By gaining a deeper understanding of these major pairs, forex traders can develop a solid foundation for analyzing currency market trends, making more informed trading decisions and capitalizing on potential opportunities in the dynamic world of forex trading.

In this article, Benzinga delves into the fundamentals of the most actively traded currency pairs with the goal of shedding light on their composition, significance and the factors that influence their movements. 

What are Currency Pairs?

Currency pairs serve as the fundamental building blocks of the foreign exchange market that is commonly referred to as the forex market. In forex trading, currencies are traded in pairs, and their exchange rate reflects the relative value of one currency quoted in terms of another. 

A forex pair or currency pair consists of two currencies. The first currency listed in the pair is known as the base currency, while the second currency is called the quote or counter-currency. The exchange rate between the two currencies determines how much of the quote currency is needed to buy one unit of the base currency.

Currency pairs are represented by a three-letter code assigned by the Swiss-based International Organization for Standardization (ISO). The first two letters of the ISO code denote the country or region, while the third letter represents the currency itself. 

For example, the popular EUR/USD currency pair represents the euro as the base currency and the U.S. dollar as the quote currency. The exchange rate for this currency pair indicates how many U.S. dollars are required to buy one euro.

Currency pairs are categorized into four main types: major pairs, minor pairs, cross-currency pairs and exotic pairs. Major pairs involve the currencies that are the most actively traded globally, such as the euro, U.S. dollar, Japanese yen, British pound, Swiss franc, Canadian dollar and Australian dollar. 

Cross-currency pairs do not involve the U.S. dollar, and the most actively traded among these pairs consists of major currencies traded against each other. An example of a cross-currency pair is EUR/GBP, which represents the EU euro quoted in terms of the British pound.

Minor pairs typically involve the U.S. dollar as the base currency quoted against less actively traded currencies like the South African rand. Exotic pairs generally involve one major currency like the U.S. dollar paired with a currency from an emerging or less frequently traded economy like the Brazilian real or Mexican peso.

Understanding currency pairs is vital in forex trading, since they form the basis for analyzing currency market trends, determining trading strategies and executing forex trades on your broker’s trading platform. Traders closely monitor the fluctuations in the exchange rates of currency pairs to identify potential opportunities for making a speculative profit. 

Some forex market participants, including international investors and corporations, also need to know about currency pairs so that they can hedge against currency risks when engaging in cross-border trade and investment activities.

Types of Currency Pairs

The four main types of currency pairs used in forex trading include the majors, crosses, minors and exotics. Each type represents a different combination of currencies and has its own characteristics and trading dynamics that are explained further in the sections below.

Major Pairs

Major currency pairs are the most commonly traded and widely recognized pairs in the forex market. They involve the world's strongest and most liquid currencies, including the U.S. dollar (USD), euro (EUR), Japanese yen (JPY), British pound (GBP), Swiss franc (CHF), Canadian dollar (CAD) and Australian dollar (AUD). Major pairs always have the USD as either the base or quote currency. Examples of major pairs include EUR/USD, USD/JPY, USD/CHF and GBP/USD. These pairs typically exhibit high liquidity and tight dealing spreads, and they are influenced by major global economic and political events, as well as by domestic factors that affect the relative value of their component currencies.

Crosses

Cross currency pairs, also known as crosses, do not involve the U.S. dollar as either the base or quote currency. Instead, they consist of two other currencies traded against each other. Like the majors, cross-currency pairs are denoted by their three-letter currency codes. Examples of popular crosses include EUR/GBP, GBP/JPY, EUR/CHF, AUD/JPY, GBP/CAD and AUD/CAD. These pairs often exhibit lower liquidity and wider dealing spreads compared to major pairs. Crosses can provide opportunities for traders looking to diversify their portfolios and capitalize on specific long-term exchange rate trends and carry trades. They can also be used in triangular arbitrage strategies if their exchange rate gets out of line compared to the exchange rates of their component currencies quoted versus the USD.

Minor Pairs

Minor currency pairs generally involve a major currency, typically the USD, paired with an infrequently traded currency of a lesser economy. These pairs are less liquid and have wider spreads compared to major and major cross-currency pairs. Examples include USD/SGD (U.S. dollar/Singapore dollar), USD/ZAR (U.S. dollar/South African rand) and EUR/TRY (euro/Turkish lira). Trading minor pairs requires careful analysis and understanding of the unique economic and geopolitical factors influencing the respective countries.

Exotic Pairs

Exotic currency pairs typically involve the currency of a major economy like the U.S. traded against a less commonly traded currency from a developing or emerging economy. These pairs tend to have low liquidity, wider dealing spreads and higher volatility, making them more challenging to trade. Examples of exotic pairs include USD/THB (U.S. dollar/Thai baht), GBP/PLN (British pound/Polish zloty) and USD/MXN (U.S. dollar/Mexican peso). Because of their inherent risks, exotic pairs are typically traded by experienced, risk-tolerant traders.

Knowing the characteristics and behavior of each type of currency pair is essential for forex traders to develop effective trading strategies, manage risk appropriately and take advantage of opportunities that arise in the dynamic foreign exchange market.

Characteristics of Major Currency Pairs

Major currency pairs exhibit several distinct characteristics that distinguish them in the forex market and make them easier to trade. Some key characteristics of the major currency pairs include:

High Liquidity

Major currency pairs are known for their high liquidity. This means that a large volume of buyers and sellers are actively trading these pairs, typically resulting in tighter bid-ask spreads that scalpers thrive on. High liquidity also ensures that traders can enter and exit positions quickly without significant order slippage, which is particularly important for short-term forex traders and scalpers.

Tight Dealing Spreads

Major pairs generally have tighter bid-ask spreads compared to other types of currency pairs. Spreads represent the difference between the exchange rate you can sell a currency pair at and the rate you can buy a currency pair at. Because oftheir popularity and high trading volume, major currency pairs tend to have competitive dealing spreads, making them cost-effective for traders.

Widely Covered and Analyzed

Major currency pairs receive significant attention from analysts, financial institutions and news outlets worldwide. As a result, there is an abundance of information, analysis and research available for traders to base their decisions on. This extensive coverage enhances transparency and allows traders to access a wealth of fundamental and technical analysis on these pairs.

Influenced by Global Economic Events

Major currency pairs are highly sensitive to global economic events, political developments and central bank decisions. Economic indicators, such as GDP figures, employment reports and interest rate decisions, can have a significant impact on the valuation of major currencies. Traders closely monitor these events and use them as cues to anticipate potential price movements in major currency pairs.

Lower Volatility

Major pairs typically exhibit lower volatility compared to crosses or exotic pairs. While they still experience fluctuations in prices, the relatively stable economic conditions and extensive trading activity associated with major currencies contribute to lower volatility levels. This characteristic can be attractive for traders who prefer a more stable and predictable trading environment.

Better for Technical Analysis

Major currency pairs are widely traded, and their price movements often adhere well to technical analysis principles. Technical indicators and chart patterns can be effectively applied to identify trends, support and resistance levels and potential entry and exit points in major pairs. This quality makes technical analysis a valuable tool for traders focusing on major currency pairs.

The unique characteristics of major currency pairs allow forex traders to tailor their strategies, manage risk better and make more informed trading decisions. The combination of high liquidity, tight dealing spreads, extensive media and analyst coverage and their sensitivity to global economic events makes trading one or more major pairs essential for most active forex traders.

Top Major Currency Pairs in the Forex Market

Forex traders actively operate in the major currency pairs because of their market importance, volatility and potential for capturing profitable trading opportunities. The bar chart below shows the leading forex currency pairs as of April 2022 listed by share of daily average turnover seen in the forex market.

The top major currency pairs actively traded in the forex market include EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD and USD/CAD. They generally represent significant economies, exhibit high liquidity and trading volume and are influenced by a range of economic, monetary and geopolitical factors. More details on each of these majors and why they are so actively traded appear below.

1. EUR/USD

EUR/USD is widely considered the top major currency pair for several reasons. First of all, it consists of the currencies issued by two of the largest economies in the world, the Eurozone and the United States. The Eurozone is made up of multiple countries, including Germany, France, Italy and Spain, making it a significant economic force globally. Also, the U.S. dollar (USD) is the world's primary reserve currency, so the state of the U.S. economy can have a substantial impact on the world’s financial markets. The EUR/USD pair exhibits high liquidity and very tight dealing spreads. The pair is also heavily influenced by U.S. and EU economic indicators, monetary policy decisions from the European Central Bank (ECB) and the Federal Reserve (Fed) and relevant geopolitical events.

2. USD/JPY

USD/JPY is considered a top major currency pair because of its connection between the major economies of the United States and Japan. The United States is a global economic powerhouse, while Japan has a significant global presence in various industries, including automotive, technology and manufacturing. The USD/JPY pair is influenced by U.S. and Japanese economic data, the interest rate differential between the two countries and monetary policy decisions from the Bank of Japan (BoJ) and the Federal Reserve (Fed). Traders tend to be attracted to the USD/JPY pair because of its high liquidity, moderate volatility and the potential for capturing exchange rate movements in response to changes in market sentiment and risk appetite.

3. GBP/USD

GBP/USD, also known as Cable, is a top major currency pair that represents the exchange rate between the British pound (GBP) and the U.S. dollar (USD). The pair is highly influential and widely traded because of the economic and historical significance of both countries. The United Kingdom is a major financial hub with global influence, while the United States is a world economic leader. GBP/USD is influenced by U.S. and U.K. economic indicators, monetary policy decisions from the Bank of England (BoE) and the Federal Reserve Bank and political developments, particularly those related to Brexit. The pair exhibits significant liquidity and decent volatility, and it attracts traders seeking opportunities that arise from market fluctuations.

4. USD/CHF

USD/CHF is the exchange rate between the U.S. dollar (USD) and the Swiss franc (CHF). This pair is considered a major currency pair because of Switzerland's strong financial industry and its traditional reputation as a safe-haven currency since the Swiss franc is often sought out by investors during times of uncertainty or market turbulence. USD/CHF is influenced by economic indicators in the U.S. and Switzerland, monetary policy decisions from the Swiss National Bank (SNB) and the Federal Reserve, as well as global economic and geopolitical events. The pair exhibits significant liquidity and volatility that traders may appreciate, and it is also attractive to investors looking for stability and diversification.

5. AUD/USD

AUD/USD is one of the major currency pair that represents the Australian dollar (AUD) quoted in terms of the U.S. dollar (USD). Australia is a resource-rich country with significant ties to Asia-Pacific economies, while the United States is a major trading partner. The pair is influenced by commodity prices (especially gold, oil and agricultural products), economic indicators in both countries, interest rate differentials that can make carry trading attractive and monetary policy decisions from the Reserve Bank of Australia (RBA) and the Federal Reserve. AUD/USD offers substantial liquidity, volatility and opportunities for traders looking to profit from trends in commodities and economic developments in the two countries.

6. USD/CAD

USD/CAD represents the U.S. dollar (USD) quoted in terms of the Canadian dollar (CAD). It is considered a major currency pair because of the economic ties between the United States and Canada, as well as those countries' status as major trading partners. Canada is rich in natural resources, particularly gold and oil, so fluctuations in commodity prices can influence the pair’s exchange rate. USD/CAD is also affected by economic indicators in each country, interest rate differentials, monetary policy decisions from the Bank of Canada (BoC) and the Federal Reserve and the state of economic ties between the two countries. The pair offers traders liquidity, volatility and the opportunity to operate in a commodity-related currency pair.

Note that the USD/CNY exchange rate is not actively traded by forex traders, even though it made up 6.6% of daily forex market turnover in April 2022. The Chinese renminbi is tightly managed by the Chinese government and has only been allowed to float in a narrow margin around a fixed base rate determined with reference to a basket of world currencies since 2006.

Tips for Trading Major Currency Pairs

When trading major currency pairs in the forex market, some useful tips to consider include:

Stay Informed

Forex traders typically need to stay updated on global economic news, central bank announcements and geopolitical events that may impact the major currency pairs they are trading. Economic indicators, monetary policy decisions and political developments can significantly influence currency pair exchange rates. Use reliable news sources, economic calendars and market analysis to stay informed and make better trading decisions.

Understand Intermarket Relationships

Major currency pairs often trade in an interconnected manner with other related markets, including those for commodities, stocks and bonds. Keep an eye on correlations between currencies and other assets to identify potential opportunities or risks. For example, the values of commodity-linked currencies like the Australian dollar (AUD) and the Canadian dollar (CAD) may be influenced by price changes in the commodities those countries export.

Use Technical Analysis

Apply technical analysis tools and indicators to identify currency pair trends, support and resistance levels and potential trade entry and exit points. Major currency pairs often exhibit well-established chart patterns and respond well to technical signals. Use a combination of technical indicators to guide your trading decisions, such as moving averages, momentum oscillators and trend lines, for example.

Manage Risk and Money Prudently

Implement proper risk and money management techniques to protect your trading capital and increase your chances of achieving long-term success as a forex trader. Set appropriate stop-loss orders to limit potential losses and establish take-profit levels to secure profits. Determine your risk tolerance and adjust position sizes accordingly. Avoid overtrading and stick to a disciplined trading plan you develop and test before implementing it in a live account. Determine your risk-to-reward ratio for each trade and consider using techniques such as trailing stops or scaling in and out of positions.

Adapt to Changes in Market Volatility

Major currency pairs may experience periods of high volatility, particularly during important economic data releases, monetary policy shifts or unexpected geopolitical events. Be prepared for sharp market fluctuations from time to time and adjust your trading strategy accordingly. Consider using volatility-based trading strategies that involve adjusting your position sizes during volatile periods.

Analyze Multiple Timeframes

Analyze major currency pairs using different timeframes to gain a comprehensive view of the market. While daily or weekly charts provide a broader perspective, shorter timeframes like hourly or 15-minute charts can help with identifying intraday trading opportunities, improving your timing and fine-tuning your trade entry and exit points.

Watch Interest Rates

Interest rate differentials between major currencies can significantly impact their exchange rates and lead to substantial market trends over time. Monitor changes in monetary policies and interest rate decisions by central banks that issue any of the currencies you plan on trading. Higher interest rates in one currency relative to another may attract investors, which can significantly strengthen that currency over time.

Remember that trading major currency pairs requires discipline, knowledge and continuous learning and market monitoring to stay up to date. Regularly review and adapt your trading strategies based on market conditions and your own performance. Practice patience, consistency and risk management to improve your chances of success in forex trading.

Should You Trade the Major Currency Pairs?

Trading the major currency pairs can make great sense for many forex traders because of their numerous advantages. Major pairs offer high liquidity, which means that you can easily enter and exit positions at desired prices without experiencing significant order slippage. 

This liquidity also ensures that your trades can be executed efficiently and without major obstacles. Another plus of the major pair’s high liquidity levels is that they usually display tight dealing spreads, making them more cost-effective to trade. This aspect allows you to minimize your transaction costs and potentially increase your overall profitability.

Major pairs tend to receive extensive coverage and analysis from financial institutions and news outlets, which can provide valuable insights and help you make more informed trading decisions. Major currency pairs also tend to be more stable and less volatile compared to some minor, cross or exotic pairs, which can be attractive if you are seeking a more predictable trading environment. 

Trading the major pairs will thus make sense for most forex traders. Still, since each trader's preferences and trading strategy may vary, you will want to carefully assess your own risk tolerance and trading goals so that you can adapt your approach to trading the major currency pairs accordingly.

Frequently Asked Questions