A Closer Look at Major Currency Pairs

Major currency pairs form the heartbeat of the forex market, dictating the rhythm of trading fortunes. While these pairs typically adhere to tighter price ranges, their potential for volatility persists.

Dive into the dynamic world of forex as we uncover the intricate tapestry of major currency pairs. We’ll dissect the beating heart of the forex market, unravelling the unique characteristics, driving forces, and captivating dynamics that make these pairs a focal point of international trade and investment. 

But first, why do traders prefer major currency pairs?

Major currency pairs take centre stage in forex trading, thanks to their narrower spread, drawing a larger number of traders and consequently boosting trading volumes. The increased trading volumes facilitate smoother market entry and exit.

On the flip side, minor currency pairs, known for their lower trading volumes, lose some of their appeal as they are more prone to slippage. Since every transaction can significantly affect the exchange rate, it comes with a level of risk.

The Big Four (Major Currency Pairs)

The interpretation of “major currency pairs” can vary among traders, but it traditionally includes the top four pairs for trading: EUR/USD, USD/JPY, GBP/USD, and USD/CHF. Additionally, “commodity currencies” and “cross currencies” fall under the major category. The most-traded “commodity currencies” against the US dollar are AUD/USD, USD/CAD, and NZD/USD. Meanwhile, the most popular pairs for cross currencies include GBP/EUR, EUR/CHF, and EUR/JPY.

This power pair is the world’s most traded currency pair. Since the US dollar and the euro are backed by the world’s two largest economies, the pair tends to be less volatile, and it enjoys high liquidity with brokers often offering tight spreads.

The distinctive feature of this pair is its relatively large pip value, usually quoted with just two decimal places, attributed to the yen’s lower value against the dollar as the quote currency. This is influenced by the Bank of Japan’s policies, including quantitative easing and persistently low-interest rates, aimed at addressing low inflation and sluggish growth.

The pair exhibits a strong correlation with the EUR/USD, primarily because the UK’s economy is closely linked to the European Union. This correlation contributes to tight bid-ask spreads in the pair, making it a favourite among traders, thanks to its high liquidity.

Similar to the yen, the Swiss franc’s popularity stems from its stability, especially during economic uncertainty. Switzerland’s reputation for financial stability and its close economic ties to the eurozone result in the Swiss franc often moving in line with the euro during low market volatility.

Mining commodities, agriculture, and China’s economic performance as a major trading partner influence the pair, with the Reserve Bank of Australia also playing a significant role.

The Canadian dollar’s value is closely linked to oil prices (oil being Canada’s primary export). Therefore, any oil price changes, perhaps due to shifts in OPEC production quotas, are likely to impact the Canadian dollar.

Agriculture, international trade, and tourism are vital to the New Zealand economy, influencing the pair’s price movements. The Reserve Bank of New Zealand’s interest rate decisions can also have a significant impact, particularly when divergent from the actions of the US Federal Reserve.

This pair reflects the UK economy’s link to the Eurozone, marked by increased volatility since the Brexit vote in 2016 and the 2020 Covid-19 pandemic.

The pair is popular in market volatility due to the Swiss Franc’s safe-haven status. It represents the Swiss and Eurozone economies, known for its stability.

Ranked as the world’s second-largest currency, the euro holds a crucial role in its pairing with the yen. Market sentiment and the prevalence of JPY carry trades heavily impact its performance.

What goes on behind these major currency pairs?

Major currency pairs’ exchange rates are shaped by central banks, which use overnight interest rates to keep their economies stable. More people want that currency when these rates go up, making it stronger.

Economic data releases, such as CPI, GDP, and employment data, offer insights into a nation’s economic performance, influencing currency rates. Political events, such as elections and policy changes, can create uncertainty and impact a currency’s value.

Final thoughts

In summary, our exploration of the major currency pairs within the forex market reveals a captivating world where economic forces, geopolitical events, and market dynamics converge. Each combination carries its own narrative of global finance and trade. Recognizing these nuances transcends the realm of trading and investing; it embodies an understanding of the intricate connections that define our globally interconnected economy. As financial markets continue to evolve, remaining well-versed in the dynamics of these major currency pairs becomes an essential tool for navigating the ever-shifting landscape of international finance.

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