Forex, or the foreign exchange market, is where currencies are traded. Simply put, the mechanism of this market involves trading currencies in pairs; you sell one to buy another. The significant point here is that in the same way that economies of different countries differ in scale and strength, so do their currencies. More importantly, different currencies belong to various categories, the most popular of which are called major pairs. Major currency pairs in forex trading are considered the most popular among traders due to the pairs’ high liquidity and trading volume.
This article aims to provide the list of major currency pairs in forex, the reasons for their popularity, and the trading strategies for each, as well as the best times to trade them.
What Are Major Currency Pairs?
Hundreds of currencies are available for trading in the forex market. However, not all of them are actively traded. Usually, currencies are categorized into three groups based on their liquidity and the volume of daily trades: the majors, the crosses, and the exotics. Since the focus of this blog post is major currency pairs in forex trading, we will postpone the explanation of the two other groups. But what are the major currency pairs?
The definition is straightforward. The major currency pairs always include the U.S. dollar. However, does this mean that any pair with the U.S. dollar on one side is considered a major currency pair? The answer is no. The other side must be one of the most frequently traded currencies. Since this might seem a vague category, we will explicitly list the major currency pairs in the next part.
List of major currency pairs in forex
Before learning about the names of major currency pairs in forex trading, there is one significant point you must fully comprehend. It is simple, yet crucial to know. Each currency pair in forex indicates the economic relationship between the two countries. Furthermore, various factors, such as political stability, interest rates, and inflation, impact the exchange rate of a currency pair.
Although there are eight major currencies, the major currency pairs are seven, as listed below:
EUR/USD
This pair is the most traded currency pair in the world, involving the Euro of the Eurozone and the U.S. Dollar.
USD/JPY (U.S. Dollar/Japanese Yen)
This pair also possesses an enormous volume of trades in the forex market. It is an indicator of the economic relations between the United States and Japan.
GBP/USD (British Pound/U.S. Dollar)
Widely known as “Cable,” this pair represents the exchange rate between the British Pound and the U.S. Dollar.
USD/CHF (U.S. Dollar/Swiss Franc)
Also called the “Dollar Swissie,” this pair denotes the exchange between the U.S. Dollar and the Swiss Franc.
AUD/USD (Australian Dollar/U.S. Dollar)
Represents the trading relationship between Australia and the United States.
USD/CAD (U.S. Dollar/Canadian Dollar)
Since Canada is a major exporter of oil, this pair is highly affected by oil price fluctuations. It’s noteworthy that this pair is sometimes referred to as the “Dollar Loonie,” based on the loon depicted in Canadian currency.
NZD/USD (New Zealand Dollar/U.S. Dollar)
Known as the “Dollar Kiwi,” this pair represents the exchange between the New Zealand Dollar and the U.S. Dollar.
Critical Factors of Major Currency Pairs
As mentioned in previous parts, currency pairs are categorized into three different groups. Before deciding whether to trade major currencies or other groups, you must understand the criteria used to differentiate these pairs.
Liquidity
The liquidity of a currency pair refers to the number of active traders and the volume of trades. The more frequently a currency pair is traded, the higher its liquidity. Liquidity offers several advantages, including better predictability, immediate execution, and lower transaction costs.
Trading Volume
Major pairs account for the majority of trading activity in the forex market, ensuring consistent price movements and trading opportunities.
Global Economic Significance
Another key feature of major currency pairs is that they include currencies from the world’s strongest and largest economies. The strength of these currencies is rooted in their countries’ significant roles in global trade and frequent usage in international transactions.
Read More: Forex Market Hours
Strategies for Major Currency Pairs in Forex Trading
To elaborate on the strategies that can be applied when trading major currency pairs, we must first identify strategies suitable for all major pairs, followed by those specifically effective for particular pairs.
Trend Following
As the name suggests, this strategy involves following established trends in the forex market. Traders attempt to identify sequences of higher highs and lower lows to pinpoint the buy and sell points that maximize profits.
Swing Trading
Swing traders usually execute trades over several days or weeks, benefiting from market waves. This strategy is well-suited for markets with clear fluctuations.
Scalping
Scalping is preferred not by long-term investors but by traders looking to execute a large number of trades with small profits on a daily basis. Since major currency pairs typically have lower spreads, they are particularly attractive to scalpers.
Carry Trade
Though mostly used for exotic pairs, the carry trade can also be effective when trading major pairs. This strategy capitalizes on the interest rate differentials between currencies—borrowing from a currency with a lower interest rate and investing in one with a higher interest rate.
Choosing the right strategy depends on your trading approach, financial goals, time, personality traits, capital, and many other factors. In the next parts, we’ll explore some of the strategies and factors to consider when trading each major currency pairs.
EUR/USD Trading Strategies
Even though EUR/USD is the most liquid and popular major currency pair for forex traders, there are key notes you need to consider:
News Trading
Currencies’ values react to economic news immediately. In the case of the EUR/USD pair, economic announcements from the United States and the Eurozone, particularly from major economies like Germany, impact the pair significantly. News traders capitalize on the market volatility following these releases.
Even if you choose not to trade at the time of news releases, staying informed about economic updates affecting EUR/USD is important. These include:
Monetary Policy Decisions
Announcements from the European Central Bank (ECB) and the Federal Reserve (Fed) regarding interest rates or quantitative easing measures.
Economic Data Releases
Reports such as employment figures, inflation rates, GDP growth, and manufacturing outputs.
Political News
Major political events, such as elections, referendums, wars, and local conflicts, or significant legislative changes in either the U.S. or the Eurozone.
Interest Rate Differentials
A crucial factor in shaping the oscillations of EUR/USD is the difference in interest rates between the ECB and the Fed. Let’s clarify this with an example: if the Federal Reserve increases interest rates while the ECB decreases or maintains theirs, this results in the USD strengthening against the EUR.
It is therefore crucial to follow news and forecasts regarding future decisions by the ECB and Fed. Markets prepare for forecasted figures, and when actual numbers are lower, higher, or the same as expected, markets react in specific ways. Therefore, not only do the actual interest rate figures matter, but also the analysis and preparation for different scenarios and market reactions are significant.
Read More: Cross Currency Pairs
Things to Consider When Trading USD/GBP
Being informed of major political and economic events in these two regions is vital for trading the USD/GBP pair.
Economic Indicators Specific to the U.S. and U.K.
Interest Rate Decisions
The Federal Reserve’s and the Bank of England’s interest rate decisions directly influence USD/GBP. The impact mechanism is similar to that observed with USD/EUR.
GDP Reports
The strong economic growth reflected by a higher GDP affects a currency’s worth. For instance, a higher GDP in the U.K. compared to the U.S. can strengthen the GBP against the USD.
Employment Data
Employment data, such as Non-Farm Payrolls (NFP) in the U.S. and similar reports from the U.K., are critical harbingers of economic health and inflation pressures in both countries.
Inflation Data
CPI data from both countries influence central bank policies, which in turn affect the GBP/USD. Typically, higher inflation in one country compared to the other strengthens that country’s currency.
Central Bank Communications
Speeches by the Governor of the Bank of England (BoE) or the Federal Reserve Chair provide critical clues about future monetary policies.
Political Events
Political stability in the UK, along with presidential elections and major policy changes in the U.S., significantly influences USD/GBP dynamics.
Ongoing adjustments and discussions post-Brexit between the U.K. and the Eurozone continuously influence the value of the GBP and, consequently, the USD/GBP pair.
Trading the USD/JPY Currency Pair
We’ve already mentioned many of the factors that influence the worth of the USD and the direction of its trades. In this section, we’ll focus on points that are specific to the relations between Japan and the United States that potentially affect the USD/JPY and the items that particularly influence the worth of the Japanese Yen.
Monetary Policies
As we’ve explained before, the Federal Reserve sets the monetary policies of the U.S. But what about Japan? The Bank of Japan is the governmental organization responsible for setting interest rates, which significantly influence the JPY. In addition to setting interest rates, the BoJ’s extensive quantitative easing (QE) programs aim to stimulate the Japanese economy, leading to volatility in the JPY.
Economic Indicators
One of the key Japanese economic releases that every JPY trader must be aware of is the Tankan Survey, a quarterly economic survey of Japanese businesses. This survey, issued by the BoJ, offers insights into the economic health of Japan.
Geopolitical Factors
Since the economic relations between two countries heavily influence a currency pair, and because the U.S. and Japan engage in frequent trade, any negotiation, agreement, or dispute in trade between the two countries can bring about fluctuations in USD/JPY. In addition, the political stability of the Asia-Pacific region, especially involving political or military situations with North Korea, China, and other neighbors, can impact market sentiment towards the JPY.
Impact of Natural Events
The Japanese yen is prone to quick shifts after natural disasters such as earthquakes and tsunamis.
Key Factors Influencing the USD/CAD Exchange Rate
Before trading the USD/CAD currency pair, you should be aware of the causes of CAD price movements leading to changes in the USD/CAD exchange rate.
Oil Prices
As one of the world’s largest oil exporters, Canada’s economy is highly susceptible to oil prices. Therefore, rises and falls in oil prices correspondingly strengthen or weaken the CAD.
Interest Rate Decisions
Monetary policies set by the Bank of Canada (BoC) and the U.S. Federal Reserve significantly impact USD/CAD. As previously discussed, differences in interest rate approaches determine the direction of a currency pair.
Trade Balance
Besides other economic indicators like GDP and employment data, the trade balance between the U.S. and Canada influences the CAD. A surplus in Canada’s trade balance, which means a higher number of exports than imports, potentially strengthens the CAD, while a deficit has the opposite effect.
The Best Time to Trade Major Currency Pairs in Forex
First, determine if you want to trade during news releases, a time when markets experience rapid fluctuations that could lead to unprecedented losses or gains. Secondly, the best times to trade a major currency pair are during the overlapping market hours when multiple trading sessions are open simultaneously.
For instance, the London and New York overlap from 8:00 AM to 12:00 PM EST is a suitable time for trading due to its high liquidity. This ensures that trades are executed promptly. Another example is the Sydney and Tokyo overlap from 7:00 PM to 2:00 AM EST, which provides substantial trading opportunities, though less than the NY-London overlap.
Opofinance Trading Accounts for Major Pairs
At Opofinance, acknowledging the unique needs and strategies of traders has always been our priority. As a result, we’ve developed and offered a variety of Forex Account Types to cater to the diverse preferences of traders focusing on major currency pairs. Before choosing an account type, define your trading style, strategy, and financial goals to select the one that aligns with these factors.
Standard Trading Account
If you prefer long-term trades and minimal commissions, the Opofinance Standard Trading Account is well-suited for you. With this account, you can benefit from normal spreads, resulting in simplicity and predictability in trade costs.
ECN and ECN Pro Accounts
We recommend the ECN account for scalpers and day traders who execute large volumes of trades in a brief period. These accounts offer lower spreads and low commissions.
The ECN Pro account is ideal for traders with larger capital looking to further optimize their trading. With ECN Pro, you’ll experience an enhanced trading environment as well as tighter spreads, making it the best choice for high-volume trading activities.
Conclusion:
To sum up, there are seven major currency pairs in forex trading, each of which consists of the USD and the currency from one of the other seven major economies. Additionally, we’ve delineated the features that categorize them as major pairs and the strategies and considerations that are significant for trading each one. By understanding these points, you can increase the success rate of your trades while knowing what factors you should be aware of and what areas you need to be educated on. To learn more about trading major currency pairs in forex and to find the Opofinance trading accounts that best suit your approach, you can simply contact our support team.
