If you’ve decided to trade the Forex market, you might be wondering what kind of currency pairs to focus on while creating your strategy and trading plan. Well, it’s always best to focus on highly liquid pairs, so then you can take advantage of cheaper trading costs and higher trading volume.
Among the most heavily traded currency pairs on the currency market, you’ll find the major currency pairs, also simply called the ‘majors’. These pairs include currencies from the world’s richest and more powerful countries, such as the USD, the EUR, the JPY, the GBP, and the CHF.
Remember that Forex trading means trading one currency against another, which implies that you’ll always have to trade currency pairs if you want to trade the Forex market – not single currencies.
What are major currency pairs?
The most heavily traded currency pairs – the EUR/USD, the USD/JPY, the GBP/USD, and the USD/CHF, are said to be the main drivers of the forex market, as they contribute such a huge volume relative to the entire Forex market.
Chief of these is the EUR/USD, as the individual currencies represent two of the largest economies in the world. In fact, according to the BIS Triennial Central Bank Survey from 2019, the USD was one side of 88% of all transactions.
While these four are regarded as the dominant pairs, there are a further three significant pairs that are known by many as ‘commodity currency pairs’. These include the AUD/USD, NDZ/USD, and the USD/CAD, and they’re generally closely tied to price swings in the commodities that are exported and imported by the countries they represent.
What makes major currency pairs move up or down?
Supply and demand represent the greatest common denominator in what moves currency pairs. This is affected chiefly by the following factors:
Differences in interest rates
When reserve banks make decisions on the state of interest rates in their country, these rates, and the way they interact with other countries’ rates, impact exchange rates, as they strongly influence the demand and offer of a given currency locally and internationally.
Inflation is a key driver in the way majors move up or down, as they influence the purchasing power of a currency. Moreover, price stability is a goal many central banks around the world aim for, which means that inflation figures influence monetary policy decisions.
International trade is another important factor in the rise and fall of currencies. Usually, when demand is great, prices tend to increase and the related currency rises in value. In contrast, if a nation imports more than it exports, there is less demand for its currency, causing prices to fall and its currency to lose value.
The price of major currencies often rises and falls on the back of the attitudes and momentum of market participants. This is known as market sentiment and reflects how traders feel about the economy, news, and local/global events. Sentiment can have a huge impact on how investors choose to trade.