Top 6 most traded Currency Pairs

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

 

Currency pairs compare the value of one currency to the value of another—the base currency (or first currency) versus 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 identified on the international market by an ISO currency code or the three-letter alphabetic code with which they are associated. As a result, the ISO code for the US dollar is USD.

 

How do Currency Pairs Work?

 

Foreign currency exchange rates fluctuate. The term "floating rate" refers to the fact that the exchange rate is constantly changing. These changes could be caused by a variety of factors. 

 

Currency pairs serve to define the value of one currency versus another, and exchange rates will fluctuate in response to the respective changing values. One currency will always be more powerful than another.

 

Rates between foreign currency pairs are calculated as a factor of the base currency. EUR/USD 1.3045 is an example of a currency pair listing. The euro (EUR) is the base currency in this example, while the US dollar (USD) is the quote currency. 

 

A ratio price is the difference between the two currencies. In this example, one euro is worth 1.3045 US dollars. In other words, the base currency is multiplied by the foreign currency's equivalent value or purchasing power.

 

Using the preceding example, a currency trader would open a position in which they are long the euro and short the dollar. The euro exchange rate must rise in order for traders to profit. 

 

When a forex trader shorts the EUR/USD currency pair, they are betting that the US dollar will rise above the euro. The percentage-in-point movement refers to changes in currency exchange rates (PIP).

 

Also Read | Insider Trading

 

 

Categories of Currency Pair

 

The simultaneous purchase of one currency and sale of another is referred to as forex trading. Currencies are traded in pairs and through a "forex broker" or "CFD provider." Currencies are quoted relative to one another.

 

The euro and the US dollar (EUR/USD) are two examples, as are the British pound and the Japanese yen (GBP/JPY). Currency pairs are bought and sold in the forex market. Consider each currency pair to be perpetually engaged in a "tug of war," with each currency on its own side of the rope. 

 

An exchange rate represents the relative price of two currencies from different countries. The exchange rate changes depending on which currency is stronger at the time. Below are the categories of currency pairs:

 

1. The "majors"—the U.S. dollar is always included in the major currency pairs.

 

2. The "crosses"- cross-currency pairs excluding the US dollar Minors are crosses that involve any of the major currencies.

 

1. Exotic currency pairs are made up of one major currency and one currency from an emerging market (EM).

 

1. Major Currency

 

EUR/USD	Eurozone/United States	euro dollar
USD/JPY	United States / Japan	dollar yen

 

The currency pairs listed above are considered "majors," and there are many more. These are the most commonly traded pairs and all have the US dollar (USD) on one side. There are only seven major currency pairs, whereas there are eight major currencies. 

 

Prices move more frequently with the majors than with the crosses and exotics, providing more trading opportunities. The majors are the world's most liquid. The term "liquidity" refers to the level of activity in the financial markets.

 

In forex, it is determined by the number of active traders who buy and sell a specific currency pair, as well as the volume of trades. The higher the liquidity of something, the more frequently it is traded.

 

For example, the EUR/USD currency pair is traded more frequently and in greater volume than the AUD/USD currency pair. This means that the EUR/USD pair is more liquid than the AUD/USD pair.

 

2. Cross Currency

 

Cross-currency pairs, or simply "crosses," are currency pairs that include any two of the major currencies except the US dollar. Minor crosses are also known as major crosses. While not as widely traded as the majors, the crosses are still fairly liquid and offer numerous trading opportunities.

 

Crosses derived from the three major non-USD currencies are the most actively traded: EUR, JPY, and GBP.

 

e.g pound crosses

 

GBP/CHF	United Kingdom / Switzerland	pound swissy
GBP/AUD	United Kingdom / Australia	pound aussie

 

3. Exotic Currency

 

A currency from a developing or emerging market is known as an exotic currency. Exotic currency pairs are made up of one major currency pair with the currency of an emerging economy, such as Brazil, Mexico, Chile, Turkey, or Hungary.

 

An exotic currency pair consists of a major currency and an exotic currency. Keep in mind that because these pairs aren't as heavily traded as the "majors" or "crosses," the transaction costs associated with trading them are usually higher.

 

E.g

 

USD/SAR	United States / Saudi Arabia	dollar riyal
USD/SGD	United States / Singapore	dollar sing

 

Also Read | Exchange Traded Funds (ETFs): Types, Features & Limitations

 

 

Most Traded Currency Pairs

 

Currency is always traded in pairs because when you buy or sell one, you must also sell or buy another. Every currency pair has a base currency and a quote currency; – the base currency appears first, followed by the quote currency.

 

The price displayed for a currency pair is the amount of the quote currency required to purchase one unit of the base currency. Some of the most commonly traded currency pairs are listed below.

 

1. EUR/USD

 

EUR/USD is the most traded currency pair on the market, accounting for 24.0 percent of daily forex trades in 2019. The EUR/USD pair is popular because it represents the world's two largest economies: the European Union and the United States.

 

Because of the high daily volume of EUR/USD transactions, the pair has a lot of liquidity, which results in tight spreads. Traders like liquidity and tight spreads because they allow them to make large trades with little impact on the market.

 

The EUR/USD exchange rate is determined by a number of factors, including interest rates set by the European Central Bank (ECB) and the US Federal Reserve (Fed).

 

2. USD/JPY

 

The USD/JPY currency pair, also known as the "gopher," consists of the US dollar and the Japanese yen. It is the second most traded forex pair on the market, accounting for 13.2 percent of all daily forex transactions in 2019.

 

USD/JPY, like EUR/USD, is known for its high liquidity, which stems from the fact that the yen is the most heavily traded currency in Asia and the US dollar is the most commonly traded currency in the world.

 

The Bank of Japan (BoJ) sets interest rates for the Japanese economy, which affects the value of the yen relative to the US dollar in the same way that the Fed and ECB do.

 

3. USD/JPY

 

The USD/JPY currency pair, also known as the "gopher," consists of the US dollar and the Japanese yen. It is the second most traded forex pair on the market, accounting for 13.2 percent of all daily forex transactions in 2019.

 

USD/JPY, like EUR/USD, is known for its high liquidity, which stems from the fact that the yen is the most heavily traded currency in Asia and the US dollar is the most commonly traded currency in the world.

 

The Bank of Japan (BoJ) sets interest rates for the Japanese economy, which affects the value of the yen relative to the US dollar in the same way that the Fed and ECB do.

 

4. GBP/USD

 

This pair's currencies are the pound sterling and the US dollar. GBP/USD is colloquially known as 'cable' due to the deep-sea cables that deliver bids and ask quotes between London and New York. The GBP/USD pair accounted for 9.6 percent of all daily forex transactions in 2019.

 

GBP/USD, like most other currency pairs, derives its strength from the relative strength of the British and American economies. If the British economy grows faster than the American economy, the pound is likely to strengthen against the dollar. However, if the American economy outperforms the British economy, the opposite is true.

 

The quoted price of GBP/USD, like the first two most popular currency pairs on this list, is influenced by the respective interest rates set by the Bank of England (BoE) and the Federal Reserve (Fed). The subsequent difference in interest rates between the pound and the dollar can have a significant impact on the price of the GBP/USD currency pair.

 

5. AUD/USD

 

The AUD/USD, also known as the 'Aussie,' represents the Australian dollar against the US dollar. In 2019, it accounted for 5.4 percent of daily forex trades. 

 

The value of the Australian dollar is closely linked to the value of its exports, with metal and mineral exports such as iron ore and coal accounting for a significant portion of the country's GDP.

 

A drop in the value of these commodities on the global market would almost certainly result in a drop in the value of the Australian dollar. In the case of the AUD/USD currency pair, this means that the US dollar will strengthen, requiring fewer US dollars to purchase one Australian dollar.

 

The AUD/USD exchange rate, like the previously mentioned currency pairs, is influenced by the interest rate differential between the Reserve Bank of Australia (RBA) and the US Federal Reserve. For example, if US interest rates are low, the USD will likely weaken against the AUD, making it more expensive to buy one Australian dollar.

 

6. USD/CAD

 

The USD/CAD pair is known colloquially as the 'loonie' after the loon bird that appears on Canadian dollar coins, and it represents the pairing of the US dollar and the Canadian dollar. 

 

USD/CAD transactions accounted for 4.4 percent of daily forex trades in 2019. Because oil is Canada's main export, the strength of the Canadian dollar is closely linked to the price of oil.

 

Because oil is priced in US dollars on global markets, Canada can earn a significant amount of USD through oil exports. As a result, if the price of oil rises, the Canadian dollar will likely strengthen against the US dollar.

 

It is a general rule that when the price of oil rises, the US dollar weakens because more US dollars must be converted into other currencies to buy the same amount of oil as before. As a result of the close relationship between the Canadian dollar and the price of oil, the Canadian dollar will likely strengthen.

 

As a result, when trading USD/CAD, traders should keep an eye on the prices of both Brent crude and US crude, as any fluctuations in the oil market will most likely reverberate in the exchange rate of this forex pair.

 

Also Read | What is an Exchange Traded Product (ETP)?

 

 

Conclusion

 

A currency pair is a price quote for the exchange rate of two different currencies that are traded in foreign exchange markets. Currency pairs are quoted based on their bid (buy) and ask (sell) prices. 

 

The bid price is the price at which the forex broker will buy the base currency from you in exchange for the quote or counter currency. The ask, also known as the offer, is the price at which the broker will sell you the base currency in exchange for the quote or counter currency.

 

When you trade currencies, you sell one currency to buy another. There are as many currency pairs as there are currencies in the world. The total number of currency pairs fluctuates as currencies come and go. All currency pairs are classified based on their daily trading volume.