Traders in the FOREX market can trade in currency pairs. Currency pairs are divided into three types. They are major, minor and exotic pairs. Major pairs, also known as majors, usually consist of the US dollar and another currency. Traders actively use these pairs for trading. Hence they are highly liquid.
Examples of major currency pairs:
- The euro and the US dollar, are denoted by the code EUR/USD;
- US Dollar and Japanese Yen, code USD/JPY;
- British Pound and US Dollar, code GBP/USD;
- US dollar and Swiss franc, symbol code USD/CHF;
- US Dollar and Canadian Dollar, USD/CAD;
- Australian dollar and US dollar, AUD/USD;
- New Zealand dollar and US dollar, NZD/USD.
Minor pairs, often referred to as cross rates, are pairs without the US dollar. For example, the pair Canadian dollar and Japanese yen, CAD/JPY, is a minor pair. Their liquidity is lower but volatility is higher.
Exotic currency pairs are pairs of the US dollar and any other currency other than the main currency. An example of such a pair is the US dollar and the Qatari riyal, code USD/QAR. These pairs are the most volatile. They also have the highest spreads.
What is a currency pair?
A currency pair is a combination of two different currencies. It is used to determine the exchange rate of the currencies in a pair. Each pair comprises a base currency and a quoted currency. The currencies in a currency pair are denoted by a three-letter acronym. The abbreviation itself consists of the name of the country and the name of the currency. In addition, in a pair, the base currency is indicated first and the quoted currency stands second.
In the USD/CAD pair, for example:
- USD is the US dollar, where US is the name of the country and D is the dollar;
- CAD is the Canadian dollar. CA stands for Canada and D is also a dollar;
- the base currency is the US dollar, the quoted currency is the Canadian dollar.
In addition, an exchange rate is indicated next to the currency pair. The exchange rate indicates how much quoted currency must be spent to purchase a unit of the base currency. Let us return to the currency pair USD/CAD. Suppose its rate is 1.5. This means that to buy one U.S. dollar you have to spend 1.5 Canadian dollars.
Traders in the FOREX market sell and buy currencies in pairs. By predicting exchange rate movements, falling or rising, traders make appropriate trades and earn profits.
Liquidity of currency pairs
Major pairs stand out for their high liquidity. This means that they can be bought or sold quickly in the FOREX market. High liquidity allows traders to enter and exit positions quickly. Major pairs also minimise the risk of slippage and give more accurate price quotes.
That is why major currency pairs are popular among traders. Their high liquidity and market activity generates the highest trading volume. It is also worth noting that major currency pairs are suitable for beginners. There is a lot of information for analytics and training materials. They make it easier to start trading in the FOREX market.
Advantages and disadvantages of major currency pairs
Each major currency pair has its own peculiarities. Traders need to take them into account when making transactions. All major pairs are highly liquid, but each also has its own peculiarities.
Thus, the EUR/USD currency pair stands out:
- wide use in international trade;
- the availability of information and analysis;
- its exchange rate depends on the EU and US economies.
The US Dollar and Japanese Yen currency pair, USD/JPY can be used as a defensive asset. Protective assets are defined as assets that do not fall in price during market turmoil. This pair usually follows stable trends and offers good opportunities for profit in times of uncertainty. However, the rate of this pair is influenced by Japanese economic policy. This should be taken into account when making decisions.
GBP/USD, the British pound and US dollar pair, has high volatility. Also, spreads for this pair are usually higher than for other major currency pairs. The peculiarity of this pair is that its activity peaks during the London trading session. The rate of the pair depends on political and economic events in the UK. This creates additional opportunities and risks for traders.
The USD/CHF currency pair has advantages, such as
- high liquidity;
- low volatility;
- the possibility of being used as a protective asset.
However, it can show less volatility than some other pairs. This could be a disadvantage for some traders.
The USD/CAD is one of the major currency pairs on the international foreign exchange market. It reflects the currency relationship between the two major economies - the US and Canada. USD/CAD is often related to oil prices. Canada is one of the major oil producers, so changes in oil prices may affect the rate of this currency pair. High oil prices tend to strengthen the Canadian dollar, while low oil prices can weaken it.
The AUD/USD is often related to commodity prices, especially gold prices. Australia is one of the largest gold producers in the world, so changes in gold prices can affect the exchange rate of this pair. AUD/USD is one of the popular currency pairs in the global foreign exchange market. In addition to the price of gold, its rate can also be affected:
- the size of interest rates in countries;
- inflation rates in the US and Australia;
- the rate of economic growth;
- level of employment.
The basic currency pair NZD/USD can be sensitive to changes in commodity prices as New Zealand is a large exporter of agricultural products. Fluctuations in commodity prices, such as dairy products or timber, could affect the pair's exchange rate.
In general, major currency pairs have attractive liquidity and activity in the FOREX market. However, each pair has its own characteristics, advantages and disadvantages. Traders should take them into account when analysing and trading. The variety of currency pairs provides traders with a wide choice for a versatile strategy and to achieve their investment goals.
The most promising currency pairs in 2023
Each trader chooses the currency pairs that he or she considers to be the best. This choice depends on the trader's strategy and preferences. Nevertheless, there are three promising currency pairs in 2023: The euro-US dollar pair (EUR/USD) is the most popular on the FOREX market. Among the major pairs, it is distinguished by its low spread and volatility. There is also a lot of information available for analytics and learning for this pair.
The British pound and the US dollar (GBP/USD) pair. A currency pair with high volatility. Trading it has high potential returns, but also proportional risks.
The US Dollar and Japanese Yen (USD/JPY) pair. Another popular pair with low spreads. Features smooth trends compared to other major pairs.
When choosing a currency pair for transactions, you must be guided by the market situation and your strategy. There is a wide range of currency pairs on the FOREX market. Therefore, it is better to try trading in a demo account first. This will help you understand the peculiarities of each pair faster and without unnecessary risks.