There are different definitions of the major forex pairs, but the four most traded currency pairs are the EUR/USD, the GBP/USD, the USD/JPY, and the USD/CHF. Other major currency pairs include the USD/CAD, the AUD/USD and the NZD/USD. The major forex pairs generally pit the currencies of developed countries versus the world’s reserve currency, that is, the US dollar. There are different factors that affect the performance of the seven major currency pairs, and this article analyzes the various fundamental factors that affect these currency pairs.
The EUR/USD currency pair, or the Eurodollar, is the most commonly traded pair globally despite being the youngest major currency pair given that the euro begun widespread circulation in 2002. The popularity of this currency pair is largely due to the fact that the pair pits the two largest world economies, which are the United States, and the European Union.
The main fundamental drivers behind this currency pair are actions by the US Federal Reserve and the European Central Bank (ECB). The interest rate decisions made by the ECB’s governing council and the Federal Reserve Open Markets Committee (FOMC) have a significant impact on the currency pair’s performance.
Whenever the Federal Reserve raises interest rates, the US dollar gains ground against the euro driving the pair lower, and the opposite is true when the ECB hikes interests, which strengthens the euro and forces the currency pair higher.
Given that this is the most traded currency pair, it is highly liquid and volatile. Exness offers a very low spread to traders who want to trade this extremely popular currency pair.
The USD/JPY currency pair is also another popular currency pair that pits the US dollar against the Japanese yen. This pair is quite different from other currency pairs because the value of a single pip is quite high as compared to other major currency pairs. The main reason for the high pip value is because of the low value of the Japanese yen as compared to the US dollar.
The Bank of Japan, which is Japan’s Central Bank has pursued accommodative monetary policies for many years in a bid to boost inflation and economic growth in the country. The BoJ has kept interest rates at extremely low levels near zero and has sometimes pursued negative interest rates, which has kept the value of the yen at depressed levels for many years.
The Japanese yen is widely regarded as a safe haven currency, which means that its value usually rises whenever there is increased volatility in the markets. For example, whenever investors are fleeing the US dollar due to trade concerns, the value of the yen typically rises as it is regarded as a safe haven currency.
The GBP/USD currency pair pits the Sterling pound against the US dollar and is also known as the cable in reference to how data was transmitted across the Atlantic Ocean between Britain and the USA. It is also the oldest currency pair and given that the pound was the world’s reserve currency before the US dollar took over it is regarded as one of the most powerful currency pairs.
In the past, the economic strength of the pound was inextricably tied to that of the euro as Britain was part of the European Union. However, since the UK is no longer a member of the EU, the pound’s value is largely determined by the monetary policies set by the Bank of England and other UK economic indicators.
This is a surprising currency pair to make it to the top four most traded currency pairs given that it pits the US dollar against the Swiss Franc. Switzerland is not a major economy, but the importance of its currency in the international markets cannot be ignored given its ‘safe haven’ status.
As a safe haven investment, the Swiss Franc usually rallies higher in times when there is uncertainty in the global financial markets, and trades lower whenever there is calm in the forex markets. Given that Switzerland is part of the European Union, the Franc sometimes mimics the performance of the euro when there is less volatility in the global financial markets.
The term commodity currencies is used to refer to the Canadian dollar, the Australian dollar and the New Zealand dollar as these countries are major exporters of commodities.
The Canadian dollar is also known as the ‘loonie’ and its performance is directly linked to the prices of commodities such as oil, natural gas and timber given the abundance of these resources in Canada. However, the commodity with the biggest influence on the loonie is oil as the loonie’s performance directly reflects the price changes in the West Texas Intermediate (WTI) also known as the Texas light sweet crude oil.
In most cases, the loonie usually rallies higher when the WTI prices increase and trades lower when WTI prices decline. The performance of the Canadian dollar is also linked to that of the US dollar given that the US is a major export market for Canada’s products. The Bank of Canada is also responsible for setting the interest rates associated with the loonie.
The Australian dollar is also known as the ‘aussie’ and is regarded as a commodity currency given the important role that commodities play in the Australian economy. Australia is a major exporter of minerals such as iron ore, gold and coal. The country also exports agricultural products such as beef, wool and wheat.
The Australian economy is one of the most resilient among developed countries given that the country has never experienced a technical recession since 1991. Despite the impact of commodity prices on the aussie, the monetary policy decisions by the Reserve Bank of Australia also affect the currency’s performance.
The New Zealand dollar is also known as the ‘kiwi’ and is regarded as a commodity currency because the country earns a significant portion of its foreign income from agricultural exports. The currency’s value usually fluctuates in response to the prices of soft commodities such as dairy products, wool, meat, fish, wood products, and machinery.
Despite being a major exporter, New Zealand is still a developed economy and the services sector makes up the largest portion of its GDP as is the case with Australia and Canada. The monetary policy decisions made by the Reserve Bank of New Zealand also affect the kiwi’s performance.
New Zealand also has a close trade relationship with Australia, hence, the performance of the kiwi might mimic that of the Aussie at certain times.
In summary, this article analyzes the main factors that affect the performance of the major forex pairs that traders should pay attention to when trading such pairs. However, this is not an exhaustive article on exactly how to trade the major currency pairs, but should be used as an introductory guide to trading each of the above pairs. Traders should conduct more research before trading the currency pairs covered in this article.