Major currency pairs

The major currency pairs are some of the most popular currency combinations in the forex market. Prices in these pairs often move in tighter bands, but their movements can still be volatile. Learn about the major forex pairs here.

Stock exchange index Source: Bloomberg

What are the major forex pairs?

Opinions differ slightly over a definitive list of major currencies, but most will include the traditional ‘four majors’ – EUR/USD, USD/JPY, GBP/USD and USD/CHF – as well as the three most-traded ‘commodity currencies’ against the US dollar, which are AUD/USD, USD/CAD and NZD/USD.

While most lists only include these seven majors, some traders would also include key currency pairings which don’t feature the US dollar at all – otherwise known as ‘cross currencies’ – in their list of major currencies. Some of the most traded of these are the GBP/EUR, EUR/CHF and EUR/JPY.

The table below gives more details about the majors, as well as their nicknames on the market.

List of major currency pairs

Currencies in the pair Nickname
EUR/USD Euro and US dollar Fiber
USD/JPY US dollar and Japanese yen Gopher
GBP/USD British pound and US dollar Cable
USD/CHF US dollar and Swiss franc Swissie
AUD/USD Australian dollar and US dollar Aussie
USD/CAD US dollar and Canadian dollar Loonie
NZD/USD US dollar and Canadian dollar Kiwi
GBP/EUR British pound and euro Chunnel
EUR/CHF Euro and Swiss franc Euro-swissie
EUR/JPY Euro and Japanese yen Yuppy

The four traditional majors

Below is a profile on each of the four traditional major currencies, as well as what affects their price movements. It is worth mentioning, that the most popular currency pairs in terms of trading volume are not always considered majors. Instead, the four majors are the more traditionally popular currency pairs on the market. As an example, AUD/USD is currently the fourth most traded currency pair in the world, but it is not counted among the four traditional majors.1

The four traditional majors are:

  1. EUR/USD
  2. USD/JPY
  3. GBP/USD
  4. USD/CHF

Trading EUR/USD

EUR/USD is the most traded forex pair in the world. It holds the euro as the base currency and the US dollar as the quote currency, so the price represents how many dollars you would need to spend in order to buy one euro. For example, if the price quoted for EUR/USD was 1.2500, you would have to spend $1.25 in order to buy €1.

The popularity of EUR/USD as a currency pair means that it is highly liquid and that brokers often offer tight spreads. Equally, it tends to be less volatile than other currency pairs because the US dollar and the euro are backed by the world’s two largest economies.

EUR/USD chart Source: IG Charts

But, this does not mean that there is no volatility in this pair – and there is still an opportunity for traders to realise a profit. This is particularly true with the uncertainty surrounding Brexit and the ongoing US-China trade war affecting the value of the euro and the US dollar respectively. Volatility in the EUR/USD pair is highlighted by the above price chart.

Trading USD/JPY

The first thing that many traders will notice about USD/JPY is that the value of a single pip is much larger than that of the majority of other currencies – often only being quoted to two decimal places. This is true for any currency pair in which the yen appears as the quote currency, and it occurs because of the relatively low value of the yen against the dollar.

The yen’s low value relative to the dollar is due in part to the quantitative easing and low interest rate policies of the Bank of Japan. The low interest rates are an attempt by the Bank of Japan (BoJ) to combat low inflation and slow growth, which has resulted in near-zero or even negative interest rates in Japan at many points in the last 20 years.

USD/ JPY (gopher)

The yen is often used as one half of a carry trade, which is where a trader borrows money in a country that has low interest rates and invests in a country that has higher ones. Additionally, the yen is widely recognised as a ‘safe haven’, which can see it rise in times of economic uncertainty. This also leads the value of the USD/JPY pair to be correlated with the USD/CHF pair – because CHF is also seen as a safe haven, which is explained in section four.

Trading GBP/USD

GBP/USD has the pound as the base currency and the US dollar as the quote currency, meaning it shows how many dollars you would need to spend in order to buy one pound. GBP/USD is colloquially called ‘cable’ on account of the deep-sea cables that used to transfer price information between London and New York.

Generally speaking, 14:00 (UK time) is when liquidity is most concentrated in this pair, due in part to the fact that this is the time which sees the most overlap in activity for traders in both London and New York.

Learn more about stock market trading hours around the world

Trading USD/CHF

The presence of the Swiss franc among the top four currencies can look a little odd at first glance. After all, Switzerland isn’t a major global economy – unlike America, Europe, Japan or the UK.

But – similar to the yen – the Swiss franc owes much of its popularity to its status as a safe-haven investment. This has made the franc a popular currency in times of economic uncertainty or market turmoil, as traders seek markets that are perceived as lower risk – similar to the USD/JPY pair.

Switzerland’s long-held reputation for financial stability, safety and neutrality ensures that its reputation as a safe haven is all but solidified. Equally, when market volatility is low, the Swiss franc will usually tend to follow the market movements of the euro, due to the close economic relationship that Switzerland has with the eurozone.

Commodity currencies

Commodity currencies are individual currencies or forex pairs in which the price is determined largely by the value of a certain commodity on which that currency’s economy is heavily dependent. The three commodity currencies that most traders will include on a list of the ‘majors’ are:

  1. AUD/USD
  2. USD/CAD
  3. NZD/USD

Trading AUD/USD

If you want to start trading AUD/USD, it is important to keep an eye on the value of coal and iron ore on the commodities market, as well as the value of other metals such as copper. This is because any fluctuation in the value of these commodities will likely cause a reciprocal fluctuation in the value of the Australian dollar relative to the US dollar.

Equally, as with other commodity currencies, the value of the US dollar greatly affects the pricing of the AUD/USD pair. This is because a stronger US dollar often means that Australian exports will be cheaper, which can reduce the value of the Australian dollar and means that Australian producers receive less money for their produce.

Trading USD/CAD

The value of the Canadian dollar is largely tied to the price of oil because oil is Canada’s main export. As a result, if the price of oil changes – perhaps because of a change in the Organisation of the Petroleum Exporting Countries (OPEC) production quotas – then the price of the Canadian dollar will likely be affected.

For example, if the supply of oil was increased by OPEC, oil’s price would likely fall which, in turn, would bring down the value of the Canadian dollar. Equally, since oil is priced in US dollars, any fall in the value of oil will likely see a reciprocal strengthening of the US dollar.

Just like with the AUD/USD pair, this means that Canadian oil exporters will receive less money for their produce.

Learn more about how OPEC influences oil prices

Trading NZD/USD

The final commodity currency which appears on most major currency lists is the NZD/USD pair. This is the New Zealand dollar against the US dollar – otherwise known as the ‘kiwi’. Agriculture – as well as international trade and tourism – is key to the New Zealand economy, so the price movements of soft commodities will often play out on NZD/USD.

As with all currency pairs, the role of each country’s central bank shouldn’t be underestimated. In this case, the Reserve Bank of New Zealand sets interest rates that can have a major impact on NZD/USD, especially when they don’t line up with what the Fed is doing.

As a result, traders should keep themselves informed on the different monetary policies of both central banks before opening a position on the NZD/USD pair.

Cross currencies

Cross currency pairs are those which don’t contain the US dollar. Some traders won’t include these pairs in a collection of major currencies. But, for this article we will briefly explore some of the cross currencies which are sometimes included as majors. Examples of highly-traded cross currency pairs include:

  1. GBP/EUR
  2. EUR/CHF
  3. EUR/JPY

These three are the cross currency pairs with the most liquidity because they all contain a different combination of the traditional majors.

Trading GBP/EUR

GBP/EUR is a key currency pair that explores the relationship between the British pound and the euro. GBP/EUR has been especially volatile ever since the UK voted to leave the European Union (EU) on 23 June 2016.

The nickname for this pair is ‘chunnel’, representing the connection between Britain and Europe via the Channel Tunnel which runs from Dover to Calais. GBP/EUR will likely offer many opportunities to realise a profit by going both long and short until Brexit is finalised and a withdrawal agreement is reached.

GBP/EUR

Trading EUR/CHF

Similar to GBP/EUR or USD/CAD, EUR/CHF sees two closely-tied economies pitted against each other – the Swiss economy against and the eurozone. Like other CHF pairs in this article, EUR/CHF can be seen as a relatively stable pair due to Switzerland’s safe haven status.

An example of the franc’s stability in relation to the euro can be seen during the European debt crisis of 2008 – after which the franc strengthened as investors turned to it as a safeguard for their capital.

For four years after 2011, the value of the franc was pegged to the euro by the Swiss National Bank. Contemporarily, the franc operates under a floating exchange rate – but this has not affected its reputation as one of the most stable currencies on the market.

EUR/CHF

Trading EUR/JPY

As the world’s second biggest currency, the euro is another key pairing with the Japanese yen. It is heavily influenced by the volume of JPY carry trades, as well as market sentiment.

EUR/JPY

Liquidity in the EUR/JPY pair is often concentrated between 8:00 and 15:00 (UK time). EUR/JPY is not as volatile as some of the other pairs on this list, but it still offers ample room for a trader to realise a profit.

What affects the price of forex pairs?

There are a number of factors which affect the price movements of every forex pair. These include interest rates, geopolitical instability, the strength of their country’s economy and the level of foreign direct investment (FDI) in the domestic market.

Interest rates are controlled by the monetary policy of that currency’s respective central bank. For example, if the US Federal Reserve (Fed) raises interest rates it will usually cause the US dollar to strengthen against the euro, causing the price of EUR/USD to drop.

This is because investors will tend to favor countries with higher interest rates than those with lower interest rates when they are deciding where to store their money. This is because with higher interest rates, an investor will receive a higher return for their initial capital.

Geopolitical instability could mean that investors and traders lose confidence in a country’s ability to govern or expect that there will be difficult times ahead for the economy which might mean that the currency stagnates or becomes too volatile to trade.

Trading a volatile market all depends on an individual trader’s appetite for risk, with some traders preferring markets with frequent movements as an opportunity to realise a quick profit.

Luckily with the majors, such movements are less frequent – although political events like Brexit can still affect the price of sterling and euro currency pairs.

FDI can affect the price of a currency pair because an increase in FDI is indicative of greater investor confidence in that country’s economy and infrastructure. This, in turn, can increase demand for that country’s currency, which will cause the price to rise.

For example, if there was a significant increase in FDI in the American economy, it would be expected that the value of the US dollar would strengthen relative to other currencies that it is paired with.

The strength of a country’s economy and the level of FDI are often directly correlated.

How to trade the major forex pairs

  1. Research which forex pair you want to trade
  2. Carry out analysis on that forex pair, both technical and fundamental
  3. Choose a forex trading strategy and check you’re comfortable with your exposure to risk
  4. Create an account and deposit funds
  5. Open, monitor and close your first position

Source

1 Bank for International Settlements, 2016


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