What Are Currency Pairs in Forex? - A Beginner's Guide

A currency pair is a quote of two separate currencies, with the value of one currency expressed against the value of the other. The first currency specified in a currency pair is known as the base currency, and the second currency is known as the quote currency.

Currency pairings compare the value of one currency to the value of another—the base currency (or first currency) to the second or quote currency. It shows how much of the quote currency is required to buy one unit of the base currency. Currencies are recognized on the worldwide market by an ISO currency code or the three-letter alphabetic code with which they are affiliated. As a result, the ISO code for the US dollar is USD.

What Are The Major Currency Pairs？

The euro versus the US dollar, denoted as EUR/USD, is a popular currency pair. Because it is the most actively traded currency pair in the world, it is the most liquid. 1 The currency rate EUR/USD = 1.2500 implies that one euro is worth 1.2500 US dollars. In this situation, the base currency is EUR, and the quotation currency is USD (counter currency). This indicates that one euro is worth 1.25 US dollars. Another way to look at it is that buying 100 euros will cost you $125.

Currency pairings are as many as there are currencies around the globe. As currencies arrive and leave, the overall number of currency pairings varies. All currency pairings are classified based on the daily volume traded for each pair.

The main currencies are those that trade the highest volume versus the US dollar, and they are as follows:

• EUR/USD or the Euro vs. the U.S. dollar,

• USD/JPY or dollar vs. the Japanese yen,

• GBP/USD or the British pound vs. the dollar,

• USD/CHF or the Swiss franc vs. the dollar,

• AUD/USD or the Australian dollar vs. the U.S. dollar,

• USD/CAD or the Canadian dollar vs. the U.S. dollar,

The last two currency pairings are referred to be commodity currencies since both Canada and Australia are wealthy in commodities and their prices impact both nations. Monday through Thursday, the biggest currency pairings have the most liquid markets and trade 24 hours a day. The currency markets start on Sunday night and conclude on Friday at 5 p.m. Eastern time in the United States.

Minors And Exotic Pairs

Minor currencies or crosses are currency pairings that are not affiliated with the US dollar. These pairings have somewhat larger spreads and are not as liquid as the majors, but they are still adequate markets. The crosses with the most volume are currency pairings whose individual currencies are also majors. EUR/GBP, GBP/JPY, and EUR/CHF are some instances of crosses.

Currency pairings from developing economies are examples of exotic currency pairs. These combinations are less liquid, with substantially bigger spreads. The USD/SGD (US dollar/Singapore dollar) is an example of an unusual currency pair.

TOP 10 STABLE CURRENCY PAIRS

EUR/USD

The EUR/USD currency pair accounts for the majority of the total trading volume. Because it combines the currencies of two big markets, this pair has high liquidity. It is known that the pair has a positive connection with the GBP/USD and a negative correlation with the USD/CHF. The overlap of the European and American trading sessions is the optimum time to trade the pair.

GBP/USD

Another popular currency combination is GBP/USD. The pair has a positive correlation with EUR/USD and a negative correlation with USD/CHF. When trading the “cable” (GBP/USD), every big news that might impact either the US or British currencies should be taken into account. The British pound is also positively related to some commodities, including basic metals and Brent crude oil.

USD/JPY

The second most traded currency pair is USD/JPY. Because the US dollar is the base currency, it is positively associated with USD/CAD and USD/CHF. USD/JPY may be traded effectively throughout Asian and North American trading sessions, particularly following major economic developments in Japan or the United States.

USD/CAD

Because the US dollar is the quote currency in all three pairings, the USD/CAD currency pair is adversely associated with the GBP/USD, AUD/USD, and EUR/USD. Because the Canadian dollar is a commodity currency, the “loonie” (USD/CAD) is heavily influenced by oil prices. As a result, traders of this pair should keep a careful eye on OPEC meetings. Understandably, the pair's busiest trading hours are those of the North American trading session.

AUD/USD

Because the US dollar is the quotation currency in these circumstances, AUD/USD has a negative connection with USD/CAD, USD/CHF, and USD/JPY. When there is relevant news in Australia, trading the pair during the North American or Pacific trading sessions may be favorable.

USD/CNY

USD/CNY is one unusual pair on the list. Because China's economy is robust, its currency is steady. The pair's moderate volatility enables traders to benefit from daily movements without the danger of too sharp price changes.

USD/CHF

The USD/CHF pair, popularly known as the “Swissie,” trades both haven currencies, the US dollar, and the Swiss franc. The USD/CHF is inversely connected to the GBP/USD and the EUR/USD. The most significant statistics that influence the quotations are Swiss and US interest rates, GDP, and employment data. The overlap between the European and North American trading sessions is most likely the optimum period to trade the pair.

GBP/JPY

Unlike the previous currency combinations, GBP/JPY does not contain the US dollar. It is heavily impacted by happenings in Japan and the United Kingdom. The pair may form powerful trends, enabling traders to profit by several pips on a single transaction. A little overlap between the Asian and European sessions might be beneficial for trading this asset.

EUR/CHF

Despite the fact that EUR/CHF (Euro/Swiss Franc) is not a prominent currency pair, it is popular among traders owing to its inverse connection with EUR/USD. During the European session, liquidity in EUR/CHF peaks. Currency traders monitor European Central Bank (ECB) releases, European employment rates, and import/export statistics. Switzerland's GDP numbers, inflation rates, and employment rates may all have an impact on the Swiss franc, so traders should keep a careful eye on them.

NZD/USD

The NZD/USD (“Kiwi”) currency combination is a popular minor currency pair. The NZD/USD is positively correlated with the AUD/USD. When trading the pair, the most significant data to watch is the Reserve Bank of New Zealand and the Federal Reserve's interest rate adjustments.

What Is A Stable Currency Pair？

When we say “stable currency pair,” we mean one that does not exhibit severe price movements over a short period of time. According to the categorization above, majors are the most liquid, and hence the least subject to significant price movements. High trading activity, particularly from institutional traders, justifies the liquidity of these pairings. A currency pair's strong liquidity ensures that you will not find yourself holding an item that you cannot sell when required because no one is willing to purchase it at the present price.

For the following reasons, the Euro/US dollar combination is recognized as the most successful currency pair in forex:

High Liquidity: The European economy is the second-largest in the world, behind the United States. As a result of the enormous number of banks and financial institutions in the United States and Europe, both currencies are the most traded.

This large trading volume leads to high liquidity since it facilitates the trading of the Euro and the US dollar. Because it is less prone to erratic price changes, the EUR/USD pair is very simple to trade.

Low liquidity also produces price gaps, making it harder to trade a currency pair.

Low Spreads and Commissions: The spread is the difference in price between the bid and ask. Because of the small gap between the bid and ask prices, the liquidity of EUR/USD results in smaller spreads and costs.

The low spread is advantageous since it facilitates efficient transaction execution and administration. Higher spreads are related to slippages, which may harm your trading outcomes.

Sufficient Volatility: To profit, all traders need a certain amount of volatility. Extreme volatility may result in unforeseen price fluctuations and the chance to earn a lot of money in a short period of time.

Low volatility generates a sluggish market environment that is simpler to forecast. The EUR/USD pair is extensively traded because the volatility is high enough for traders to benefit from, unlike other pairings such as exotics, which have unpredictable price movements.

However, when high-impact news and fundamental data are provided, the EUR/USD might display erratic price moves.

Sufficient Fundamental Data: There is sufficient and readily available fundamental and economic data linked to the economies of the United States and Europe. This is due to the size and impact of both economies attracting a great deal of attention from news media and information sources.

The majority of these are publicly accessible online and aid traders in forecasting price movement. Finding economic information and fundamental data about less developed countries, on the other hand, might be harder, leading to less informed trading judgments.

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