6 Major Forex Pairs to Trade

What are major forex pairs?

The most traded forex pairs are known as the “majors” and always contain the US Dollar on one side. This is because the USD is the world’s reserve currency and most dominant in trading volumes, according to the most recent BIS Triennial Central Bank Survey published in April 2022 ^[1]. 

While there are eight major currencies, there are only seven major currency pairs. 

• The seven ‘majors’, make up 62% of total forex market turnover ^[2]. 
• By order of trading volume, the majors are EUR/USD, USD/JPY, GBP/USD, USD/CAD, AUD/USD, USD/CHF, and NZD/USD.

Cross-currency pairs are the more frequently traded currencies that do not include the US Dollar. These are normally less liquid. Exotic currency pairs are from emerging and developing economies, paired with one major currency.  

• USD/CNY (Chinese Renminbi) accounts for 6.6% of forex market turnover according to the latest BIS report ^[3]. 
• Emerging market currencies make up 13.8% of the total turnover ^[4]. 

 Trading the major currency pairs

Three key reasons to consider when trading the majors are:

1. Liquidity – This means there is abundant liquidity and a very high level of activity in their markets. This enables traders to enter and exit their positions with ease, even when volatility is high.

2. Low spreads – High liquidity and so high volumes generally results in lower spreads. This may be beneficial to all traders seeking to keep costs to a minimum as the bid-ask spreads tend to be narrow. 

3. Less slippage – Great volume mean traders are constantly buying and selling the majors. This can result in less chance of slippage or at least smaller slippage when it does occur. Slippage, when the execution price is different to the requested price, can be an issue in less liquid markets.  

EUR/USD

EUR/USD accounts for nearly one in four forex transactions ^[5]. This means it has the largest global trading volume and is one of the most popular currency pair in the world. This outstanding liquidity means traders enjoy consistently low spreads.

By combining two of the three biggest economies, the major is an excellent measure of the overall health of the global economy. Prices in EUR/USD constantly reflect the latest economic and fundamental data, as well as the central bank policies of the US Federal Reserve and the European Central Bank (ECB). 

The ECB currently holds eight meetings per year (approximately every six weeks) with the initial policy announcement at 13:45 CET and a press conference at 14:30 CET. The bank also releases new staff macroeconomics forecasts at these meetings on a quarterly basis. 

USD/JPY

This is the second most traded currency major and it represents a major quantity of daily trading ^[6]. The yen is often seen as a “safe haven” currency and investors will buy the yen when volatility picks up and risk sentiment turns sour ^[7]. JPY is also used by carry traders who borrow the yen and invest it in higher yielding currencies. 

The Bank of Japan meets eight times a year and at four of these meetings (January, April, July and October), the bank also publishes the Outlook for Economic Activity and Prices which are its latest forecasts. 

The bank has been battling with stubbornly low inflation for decades. This has resulted in ultra-easy accommodative monetary policy with very low interest rates. 

GBP/USD

The UK is the world’s fifth biggest economy and is currently just holding off a rising India. Before World War One, the pound was the largest currency in the world with over 60% of global debt being held in sterling ^[8]. 

This major often goes by the moniker of “cable”, which originated in the mid-19^th century when undersea copper cables used to transmit the bid and ask quotes across the Atlantic. 

GBP/USD is heavily traded and shares similar characteristics with EUR/USD. Both are correlated due to the economies being interlinked, though Brexit has meant a rethink in terms of previous ties. 

The Bank of England usually meets every six weeks to decide on monetary policy which it does through the nine-person committee, the MPC. Political upheaval in the UK in recent years has also lent itself to volatility and some explosive trends. High liquidity and tight spreads make cable attractive to trade.

USD/CAD

The Canadian dollar, also known as the “loonie” is one of the commodity dollar currencies. The Canadian economy is a major exporter of raw materials and commodities which means the CAD is driven by external factors in the global economy. 

The currency is often closely correlated to crude oil prices and direction. It can also have a strong relationship with the US stock market benchmark, the S&P 500, and the global risk sentiment.

The Bank of Canada carries out monetary policy by adjusting short-term interest rates. It meets on eight fixed dates each year, typically on a Wednesday.  

AUD/USD

This is a popular forex pair with the “aussie” also regarded as a commodity dollar currency. Notably, it is not among the six pairings which make up part of the widely followed US Dollar Index. 

The Australian economy is heavily skewed towards raw materials and commodities, including iron ore and coal. That means the prices of these commodities are a key driver of AUD. Australia’s biggest export market is China, hence Chinese policies and Sino-Australian trade relations are an important factor in price action. 

Monetary policy in Australia is decided by the Reserve Bank of Australia (RBA) which normally meets eleven times each year, on the first Tuesday of each month except in January. 

USD/CHF

The history of the Swiss France goes way back to the 1700s. Its relatively small economy is a leading force for financial security and privacy, partly due to the political neutrality of Switzerland. 

The “swissie” is generally regarded as a safe-haven currency and will attract buyers in times of high uncertainty. Historically, the country has enjoyed very little inflation.

The Swiss National Bank (SNB) looks after monetary policy decisions and conducts in-depth policy assessments in March, June, September, and December. The CHF is heavily backed by large reserves of gold, bonds and financial assets which help the SNB ensure its stability during times of volatility.

References