Forex market

Learn about currency pairs in the forex market.

The forex market is an international market where foreign currencies are traded. Currency pairs vary in terms of strength, trading volume, and the economic effects associated with them.

The currency code consists of 3 letters, with the first two letters representing the country name, and the last letter representing the currency.

For example, USD represents the United States of America, with the letter D representing the currency, which is the dollar.

In this article, we will explore the types of major, minor, and cross-currency pairs traded in the forex market:

Most Famous Currencies:

EUR/USD:

The EUR/USD pair, Euro against the US dollar, is suitable for various types of traders, including day traders and long-term investors. Trading this pair provides opportunities for profit through technical and fundamental analysis, as it is affected by various economic factors such as economic growth, monetary policy, and global events.

The EUR/USD pair provides strong and reliable trading signals, making it easier for traders to make informed trading decisions. However, it requires careful study and analysis of daily fluctuations and economic news to succeed in trading this pair.

USD/JPY:

The USD/JPY pair, the US dollar against the Japanese yen, is one of the prominent currency pairs in the forex market. It is among the major pairs traded by investors and traders worldwide. It is characterized by high trading activity and liquidity, providing diverse profit opportunities.

GBP/USD:

GBP/USD, also known as "the cable," is named after the submarine cables that were previously used to transmit bid and ask prices between the exchanges in London and New York across the Atlantic Ocean.

This nickname signifies the rich history and past of this pair. Trading the GBP/USD pair shares many similarities with trading the EUR/USD pair, despite the UK never being part of the Eurozone. However, the British economy is closely linked to the European Union.

It is worth noting that the monetary policies of both countries, including the Bank of England and the Federal Reserve, have a significant impact on the performance of the GBP/USD pair.

Commodity Currencies:

AUD/USD:

Australian and New Zealand dollars are typically referred to as "commodity currencies" due to the significant role played by natural resources in the economies of these countries. Regarding the AUD/USD pair, the focus is mainly on key sectors such as mining, cattle farming, wool industry, and wheat cultivation.

Therefore, commodity prices can greatly impact the movement of the AUD/USD pair, along with interest rate decisions made by the Reserve Bank of Australia. The Reserve Bank of Australia generally adopts higher interest rates compared to some other central banks, which can also influence the movements of the AUD/USD pair.

USD/CAD:

Movements in the Canadian dollar (CAD) are heavily influenced by commodity prices due to Canada's abundant natural resources, such as lumber, natural gas, and oil. Canada is the second-largest country in the world in terms of land area, making it highly dependent on its natural resource sector in its economy.

However, the USD/CAD pair faces a unique challenge as the performance of the Canadian dollar is closely tied to the performance of the US economy. Therefore, in secondary pairs like the EUR/CAD, the performance of the Canadian dollar may be similar to that of the US dollar. But when it comes to the USD/CAD pair, it becomes difficult to predict price movements due to this close correlation.

forex market

Cross Pairs

EUR/GBP:

The EUR/GBP pair, Euro against the British pound, has experienced significant price fluctuations due to the uncertainty caused by the Brexit process. This has led to large daily price swings and strong volatility.

The EUR/GBP pair reflects the balance of power between the European and British economies. It is attractive to many traders and investors seeking to capitalize on price fluctuations resulting from political and economic developments between the two countries.

EUR/JPY:

The EUR/JPY pair, Euro against the Japanese yen, is widely traded in the currency market. This pair reflects the relationship between the Euro, which is considered the second-largest currency in the world, and the Japanese yen.

The EUR/JPY pair is of interest to traders who prefer to use the Euro as a pricing currency instead of the US dollar.

EUR/CHF:

The EUR/CHF pair, Euro against the Swiss franc, is another example of a currency pair that reflects interconnected economies. This pair is widely traded in the currency market and is popular among traders.

It's worth noting that prior to 2011, there was an official link between the value of the Swiss franc and the Euro the Swiss National Bank. However, in August of that year, the Swiss National Bank announced an increase in the minimum exchange rate of the Swiss franc against the Euro, leading to a sharp collapse of the pair and causing disruptions in the currency market.

How is the currency pair priced?

Currency pairs are priced based on the relative value of each currency in the pair compared to the other currency. In the global financial market, currency pairs are priced using what is known as the exchange rate.

When you see a currency pair like EUR/USD with a value of 1.20, it means that it takes $1.20 to buy 1 euro. In this example, the euro is the base currency, and the US dollar is the quote currency. This pricing can be used to determine the amount of quote currency needed to purchase one unit of the base currency.

What economic factors affect currency pairs

Economic factors have a significant impact on currency pairs in the financial market. Here are some key economic factors that affect currency pairs:

Interest Rates: The value of a currency is influenced by the central bank's interest rate of the issuing country. When interest rates rise, investing in that currency becomes more attractive, leading to an increase in its value against other currencies.

Inflation: The inflation rate affects the strength of a currency. When the inflation rate increases, the currency's strength and value tend to decline.

Income Distribution and Economic Growth: Economic growth and income distribution impact the strength of a currency. A strong economy and rapid growth enhance the currency and increase its value.

Trade Balance: It refers to the difference between a country's exports and imports. When a country has a positive trade balance (exports exceed imports), the currency tends to appreciate.

Monetary and Fiscal Policies: The monetary and fiscal policies of a country have a direct impact on its currency. For example, raising interest rates or implementing economic stimulus measures can influence the currency's value.

It's worth noting that these factors are not an exhaustive list, and currency values can be affected by unexpected events and other political and geopolitical developments. However, understanding and monitoring these factors is an important part of analyzing currency pairs and making trading decisions.