Major Currency Pairs Explained

Much like stocks, currency investors have a wide variety of securities to choose from. Some currencies from undeveloped countries may be volatile and illiquid, and while these features can present profitable opportunities, many investors prefer stability and predictability in their currencies. Major pairs using developed currencies can provide a safer level of liquidity and volatility, but that doesn’t mean they’re without risk. In this article, you’ll learn what the major pairs are, why they’re considered major currencies, and how they fit in a diversified currency portfolio.

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What Are Major Pairs?

Major currency pairs are the foreign exchange market’s most heavily traded assets. They typically pair the U.S. dollar with the currencies of other major global economies, such as the euro, Yen, or Pound Sterling. High liquidity, tighter spreads, and low volatility characterize these pairs, making them ideal trading vehicles.

Due to their high trading volume, major currency pairs often exhibit lower volatility than other currency pairs, making them a popular choice for novice and experienced traders. While the exact definition of a major currency pair can vary, these core characteristics generally apply. The four generally agreed-upon major currency pairs are:

• EUR/USD
• USD/JPY
• GBP/USD
• USD/CHF

Understanding the Major Pairs

A forex pair is a quote of two currencies, where the value of one is expressed in terms of the other. For instance, EUR/USD means the value of one euro in U.S. Dollars. The first is the base currency (euro), and the second is the quote currency (U.S. Dollar). When you trade a currency pair, you're betting on whether the base currency will appreciate or depreciate against the quote currency.

Unlike other assets, where advanced investors eschew basic securities, major currency pairs are favorites of both new and experienced forex traders.

• New Traders: Major currency pairs offer a less volatile starting environment. High liquidity means tighter spreads, lower transaction costs, and more stable price movements, making them easier for beginners to analyze and trade.

• Experienced Traders: Major pairs are crucial due to their liquidity. Quick and efficient execution is essential for professional traders, who often employ complex strategies and high leverage. Additionally, major pairs are frequently the most sensitive to global economic data and events, providing ample trading opportunities.

Why Do Traders Trade the Major Currency Pairs?

Forex majors provide the most liquidity along with the least volatility, which has mass appeal to traders in all parts of the world. However, liquidity and volatility aren’t the only reasons major pairs receive abundant trading volume. Here are three more important reasons why traders continue flocking to the major pairs:

• Economic Importance: The currencies involved in major pairs represent the world's largest economies. Pertinent data like GDP or inflation, domestic central bank policies, and geopolitical events directly impact major currency pairs, offering numerous trading opportunities.

• Abundance of Analysis: Due to their popularity, major pairs are extensively covered by market analysts and prognosticators. Traders can use this diverse set of information to make better investment decisions.

• Ease of Access: Major pairs are readily available on most trading platforms, making them easily accessible to traders of all skill levels and account sizes.

Top Major Currency Pairs to Trade

Here’s a more in-depth breakdown of the four major currency pairs:

1. EUR/USD

The world's most commonly traded currency pair is EUR/USD, primarily thanks to its liquidity and economic strength. EUR/USD uses euros as the base currency and U.S. dollars as the quote currency, representing the number of USD needed to buy one EUR. Traders commonly use this pair because Eurozone and United States economic data is readily available, the volatility and liquidity are high, and countless global businesses are exposed to these currencies. Factors influencing EUR/USD movements include interest rates, employment data, GDP, and inflation.

2. USD/JPY

The second most popular currency pair is USD/JPY, which represents the number of Japanese yen needed to buy one U.S. dollar. The USD/JPY has all the major characteristics traders want: liquidity, volatility, and economic importance. One unique characteristic of this pair is the yen’s place as a well-known haven asset. In times of geopolitical or financial turmoil, investors often buy yen to reduce risk. However, the opposite is true; when economic growth is strong and politics are stable, other major currencies tend to outperform the yen. Traders looking at USD/JPY must stay aware of investor risk appetites and global economic trends.

3. GBP/USD

While not the most heavily traded of the major forex pairs, GBP/USD is one of the oldest due to the deep history of economic ties between England and the United States. London and New York are often considered the world's financial capitals, so GBP/USD is frequently viewed as a barometer of the global economy. Known as ‘The Cable,’ thanks to the trans-Atlantic cable that transmits price data between continents, GBP/USD has ample liquidity, enough volatility to facilitate trades, and plenty of historical data.

4. USD/CHF

Known as the Swissy, USD/CHF pairs U.S. dollars and Swiss francs, showing how many francs are needed to purchase one dollar. Like the Japanese yen, Swiss francs are considered a safe haven currency because Switzerland has a long-standing reputation for political stability and neutrality, low levels of inflation, and a strong banking system. As with most major currency pairs, USD/CHF is highly liquid and provides plenty of volatility for trading opportunities. 

Factors Affecting Major Currency Pairs

The forex market is one of the largest asset markets in the world, and trading occurs 24 hours per day, Monday through Friday. As you might expect from a vast and ever-changing market, many factors can influence the prices of major currency pairs. Here are three crucial ones all forex investors need to consider before trading:

• Interest Rates - Monetary policy plays a significant role in pricing currency pairs, and central banks in different countries might have completely different agendas for economic stability. Interest rate differentials can drive currency pairs; high interest rates are desirable since low rates tend to weaken currencies.

• Economic Data - Central banks set interest rates based on their interpretation of economic data, so metrics like inflation readings, GDP, unemployment rates, and trade balances also strongly influence forex prices.

• Geopolitical Events - Forex investors want stability in their currencies, which is why the major pairs are all from developed countries with little political or societal unrest. Wars, terrorism, and geopolitical sanctions can all spell trouble for currency values, so the less turmoil in a nation, the more attractive its currency will be to forex traders.

Where to Trade Forex

Major Currency Pairs Bring Stability to Forex Markets, But Even Strong Currencies Carry Risks

If you think of markets in terms of stocks, consider the major pairs equivalent to large blue-chip companies. Bigger and more stable companies tend to have highly liquid and minimally volatile stocks, and major currency pairs follow a similar pattern. 

Forex pairs like EUR/USD, USD/JPY, and GBP/USD have all the characteristics investors look for, but that doesn’t mean they’re risk-free. Currencies can be volatile and unpredictable, especially during periods of rapid rate changes, high inflation, or political instability. Always research your investments and consider consulting an advisor before making large forex trades.

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