Currency pairs traded in Forex
Forex is all about attempting to speculate on the fluctuating currencies between two different countries. These two currencies are usually referred to as ‘currency pairs’ and these pairs are made up of the base currency and the quote currency. The future exchange rate and exchange rate fluctuations are core fundamentals to get under the belt. Several official currencies are used all over the world, but only a handful of these currencies are traded actively in the forex market.
What are the major currencies?
A currency can be defined as assets used as a medium of circulation, such as coins and banknotes. The UN currently recognizes 180 currencies that are used in 195 countries across the world. Examples of currencies are the US dollar, the Euro, the Japanese yen, and the British Pound Sterling which are traded on the global foreign exchange market (Forex).
In forex trading there are the eight currencies that make up the major pairs and just like other assets, the forces of demand and supply aim at determining the value of a currency relative to another currency. An increase in the supply of a currency sinks its value, while an increase in demand pushes its value. Only the most politically /economically stable and liquid currencies are demanded in sufficient quantities.
Due to the size and strength of the US economy, the US dollar (USD) is the world’s most actively traded currency while Euro (EUR) is the most actively traded currency in Western Europe. Other major currencies include the British pound sterling (GBP), The Japanese Yen (JPY), Australian Dollars (AUD), New Zealand dollar (NZD), Swiss franc (CHF), and Canadian dollar (CAD).
What are the most traded currency pairs in Forex?
The major forex pairs make up 75% of all forex traders. They are the most liquid, less volatile, and widely traded in the forex market. Since these pairs have the largest volume of buyers and sellers, they typically have the smallest bid (buy) and ask (sell) spreads. The spread is the difference between the buy and the selling price. Many forex traders would agree that the most profitable forex pairs to trade include the above seven major forex pairs. They are also associated with stable, well-managed economies and hence, less susceptible to manipulation.
In a nutshell, the major forex pairs are the most commonly traded currency pairs within the forex market. If you are interested in opening a live or demo account with FXCentrum to trade on the underlying price movements of our currency pairs, we will recommend you start your trading journey with the major currency pairs.
Currency pairs in Forex trading
There are numerous currency pairs a forex trader can choose from when placing a trade in the forex market. Major pairs are the most widely traded currencies in the foreign exchange market and they are any pair that includes the US dollar (USD), which holds the position of the largest economy in the world. Hence, the major pairs constitute the largest share of the foreign exchange market. Here is a list of the seven most traded forex pairs which are considered to be the most popular across the world.
- EUR/USD: This pair is often referred to as “Euro” and it’s the most actively traded currency pair in the world. Numerous leading banks in the world have dedicated traders who trade in EUR/USD.
- USD/JPY: This is the US dollar paired with the Japanese yen and fondly referred to as “Dollar Yen”. The Japanese Yen is the third most actively traded after the United States Dollar and the Euro. Hence, the USD/JPY pair is of extreme relevance. According to some estimates, trading in USD/JPY single-handedly accounts for about 20% of the world Forex trade
- GBP/USD: The British pound sterling and US dollar pair is often referred to as “Cable”
or “Sterling”. The British economy is among the most important world economies, also, the trade relationships between the Great Britain Pound and the United States Dollar are of extreme importance.
- GBP/USD: This is one of the oldest currency pairs traded in the market.
- USD/CHF: The US dollar and Swiss franc is also called “Swissy”. The Swiss Franc is often referred to as the haven of currencies. The USD/CHF pair falls in value when the world considers the USD to be a safe investment. However, when the dollar is falling, investors are mostly keen on investing in the Swiss Franc.
- AUD/USD: The Australian dollar and US dollar or “Aussie Dollar”
- NZD/USD: The New Zealand dollar and US dollar or “Kiwi”
- USD/CAD: The US dollar and Canadian dollar or “Dollar Canada”
These are any 2 major currencies that do not contain the USD as the counter currency. They have slightly wider spreads, deemed more volatile and less liquid than Major Pairs. Examples of cross pairs include EUR/AUD, EUR/CAD, EUR/CHF, NZD/CAD, EUR/GBP, the GBP/JPY, and GBP/AUD to name a few.
These are currencies from emerging economies paired with major currencies. They are lesser well-known currencies with wider spreads, susceptible to manipulations and can be extremely volatile in the market. They include USD/ZAR (South African Rand paired with US dollar), USD/SGD (U.S. dollar paired with Singapore dollar).HUF (Hungarian Forint) and PLN (Polish Zloty).
How to trade currency pairs?
A popular example of a currency pair is EUR/USD = 1.099985 (sell rate/buy rate). Here, the euro is the base currency while the US dollar is the quote currency. To buy one unit of the base currency, the forex trader will have to pay 1.099985 in the quote currency – US dollars. Conversely, if the trader wishes to sell one euro instead, they would receive 1.099985 US dollars.
A trader may buy the EUR/USD currency pair if they are anticipating an increase in the value of the euro relative to the dollar. Buying the EUR/USD currency pair can also be referred to as ‘going long’ while selling the EUR/USD currency pair is referred to as ‘going short’.
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Other instruments traded in CFD
Stock market indices: Indices are a measurement of the price performance of a set of shares from an exchange. For example, The US30 is a CFD (contract for difference) index that tracks the price of the DJIA; the FTSE 100 is an index that tracks the 100 largest companies on the London Stock Exchange. Other examples include GER30, NASDAQ 100, and S&P 500 (US 500) to name a few. Trading stock market indices enables you to get exposed to an entire economy at once while having to open only a single position.
Metals: these are one of the popular trading assets in forex trading platforms. Gold, palladium, silver, and platinum are traded in the same way as currencies and are paired with either USD or sometimes EUR. Examples include XAUUSD (Gold), XAGUSD (Silver), XPDUSD (palladium), XAUEUR (Gold), and XPTUSD (Platinum). They are more volatile than currency pairs.
Cryptocurrency pairs: they are quite risky to trade and inherently the most volatile pairs. Therefore, a higher margin is generally required. Examples include BTC/USD, ETH/USD, LTC/USD, and DSH/USD.
What is the exchange rate?
Often observed by forex traders, the exchange rate is simply the exchange rate, the price of a currency in relation to another currency, or the numerical ratio of one currency to another. For example, if the exchange rate of GBP/USD is 1.32100, this means that one British Pound costs $1.32100, or it takes $1.32100 to buy one British Pound. An increase in the exchange rate of a currency pair indicates that the base currency is appreciating against the quote or counter-currency or that the counter-currency is depreciating against the base currency. Likewise, a fall or reduction in the exchange rate indicates that the base currency is depreciating against the quote or counter-currency or that the quote or counter-currency is appreciating against the base currency.
The exchange rate is widely used in the Forex market “currency pairs”. Based on the duration of the forex transactions, there are two major types of exchange rates; they are spot rate and forward rate.
Factors affecting the rates of major currency pairs
The main factors that play significant roles in the rates of currency pairs are changes in market inflation, economic data, politics, changes in interest rates by central banks, and volatility.
1. Inflation rates
Fluctuations in market inflation bring about changes in currency exchange rates. A country with a relatively lower inflation rate than another’s will most likely observe an appreciation in the value of its currency. When inflation is low, prices of goods and services will increase at a slower rate. IN a nutshell, the country with a consistently lower inflation rate sees a rising currency value while a country with higher inflation typically exhibits depreciation in its currency and this is often accompanied by higher interest rates
2. Interest rates
Interest rates are influenced by Central Banks to maintain monetary stability. However, changes in these rates affect currency value and foreign exchange rates. Forex rates, inflation rates, and interest rates are all correlated. An increase in interest rates induces a country’s currency to rise due to the increased demand for that currency and higher interest rates provide higher rates to lenders, hence, attracting more foreign capital, which induces a rise in exchange rates.
Economic Data: economic reports give forex traders a glimpse into a nation’s economic performance and this influences currency rates. Economic data and reports to watch out for include Nonfarm payrolls (employment data), CPI (inflation) data, retail sales, gross domestic product (GDP), and purchasing managers index (PMI) to mention a few.
Politics: elections, corruption scandals, trade wars, and changes in policies introduce instability which in turn reflects in the forex market. The government has the jurisdiction to influence the economy which can raise or depreciate a currency’s relative value.
Volatility – many forex Traders frequently enter smaller positions on the more volatile currency pairs and bigger positions on less volatile currency pairs. However, volatility can strike any of these currency pairs at any time due to changes in the economic outlook, interest rates, or political instability. To trade forex successfully, it is imperative to follow these markets up to date, news, and analysis.