The world of forex trading revolves around currency pairs. Unlike other markets where assets are shown in absolute terms, the forex market represents the value of one currency in relation to another. In forex trading, currencies are always quoted in pairs, such as GBP/USD or USD/JPY. The first currency listed in the pair is called the base currency, and the second currency is the quote currency or counter currency.
For example, the most commonly traded currency pair is EUR/USD, where the euro is the base currency and the US dollar is the quote currency. The exchange rate for this pair indicates how much of the quote currency is required to purchase one unit of the base currency. So, if the exchange rate is 1.4745, it means one euro can buy 1.4745 US dollars.
Forex brokers typically display currency rates in a standardised format, as shown in Figure 1.2. This makes it easier to compare rates across different brokers and helps prevent confusion or mistakes.
Understanding currency pairs is vital in forex trading as it forms the foundation of analysing and predicting currency movements. By monitoring the exchange rates and considering factors that influence each currency, traders can identify opportunities to buy or sell currency pairs and potentially profit from exchange rate fluctuations.
Major Currency Pairs
Among the numerous currency pairs traded in the forex market, there is a select group known as "the majors" that dominate trading volume. These major currency pairs are highly liquid, meaning there is a large number of buyers and sellers, and they often have tighter bid-ask spreads compared to other pairs.
Here are the five major currency pairs:
EUR/USD: The euro against the US dollar is the most actively traded currency pair in the forex market. As the official currency of the European Union, the euro's value is influenced by economic data and monetary policy decisions from the Eurozone and the United States.
GBP/USD: The British pound against the US dollar is another major currency pair. The pound sterling, or the British pound, has a long history as an international currency and is influenced by UK economic data, political developments, and decisions from the Bank of England.
USD/JPY: This pair represents the US dollar against the Japanese yen. Reflecting the relationship between the world's largest economy and one of the most important economies in Asia, this currency pair is influenced by US economic indicators, geopolitical events, and decisions from the Bank of Japan.
USD/CHF: The US dollar against the Swiss franc is a major currency pair that reflects the relationship between the US dollar and Switzerland's currency. The Swiss franc is often considered a safe-haven currency, and factors such as US economic data, geopolitical events, and decisions from the Swiss National Bank can impact this pair.
AUD/USD: The Australian dollar against the US dollar is a major currency pair that represents the relationship between the Australian and US economies. Being a major exporter of commodities, the Australian dollar's value is influenced by commodity prices, Australian economic data, and US economic indicators.
These major currency pairs are actively traded and subject to various factors that can impact their value. Traders often use technical and fundamental analysis techniques to analyse these pairs and make informed trading decisions.
Understanding major currency pairs is crucial for forex traders as it provides insights into global economic trends and market dynamics. By monitoring these pairs and accompanying factors, traders can identify opportunities and potentially profit from currency movements.
