If we talk about currency pairs then it is imperative to say that their existence in the early 90s gave rise to an entire domain of trading. Nowadays, Forex enthusiasts and learners start their trading journey by learning the basics of Forex trading which usually starts with understanding currency pairs.
In its simplest terms, if we see the ticker of two currency pairs in denomination such as EUR/USD that directly refers to the currency of two different nations. To make it easier to understand, you can refer to the LHS as Base currency and RHS as Quote currency. Any online forex trading platform will display these pairs in a denomination which also gives us the exact value of one currency in reference to other currency.
The first step for forex trading beginners starts with understanding the comparison and utilising the information while trading.
For instance, when a trader is quoted AUD/USD 1.13 it means that the trader can exchange 1 Australian dollar and receive 1.13 US Dollars. Also, If the AUD/USD quotation goes from 1.13 today to 1.15 tomorrow it means that the Australian dollar has appreciated relative to the US dollar, or that the US dollar has depreciated relative to the Australian dollar.
Now that you understand the basics of currency pairs, we can understand and take the idea of the most traded currency pairs in the Forex Market which includes Major, Minors and exotic pairs. However, in this particular article, we are going to understand the three most dominant and widely traded currency pairs and how they are dependent on other factors. Let's take a look:
Also read: Forex trading for beginners
The BIS Triennial Central Bank Survey, known for its comprehensive source of information on the size and structure of global foreign exchange (FX) and over-the-counter (OTC) derivatives markets, submitted a report called Global foreign exchange market turnover in 2019. This report says that the US dollar is the dominant currency which comprises 88% of all the trades, followed by the Euro which is 32%.
If we talk about the pair EUR/USD then it makes up for 24% of the daily volume of Forex trading in 2019. You might be wondering why this specific currency is so popular. Well, here are some facts to support that reason:
In the previous paragraph, you have gained a fresh insight about the US dollar. However, the Japanese Yen is also the pioneer currency of the world economy. Though Japan is a small country, its economy is majorly dependent upon manufacturing industries. This fact gives us a broad idea that commodities like oil and spot metals can be directly linked to the strength of the Japanese Yen.
If we talk about the daily volume of transaction of the USD/JPY pair then it represents around 13.2%. Japanese Yen is Asia’s most heavily traded currency. This fact also leads to our second understanding that if two strong currencies are traded in pairs then they offer high liquidity and tight spreads. You can find these two features common in all the top traded currencies. However, the GDP of Japan, its international trade, GDP figures and the Bank of Japan’s interest rate’s decision play a significant role in the strength of the USD/JPY pair.
Trivia: The USD/JPY currency pair nicknames as ‘the gopher’.
The British pound and the US dollar represent England and the United States of America, the two most important economies of the world. You have learnt about the American dollar in the previous section. Now, let's clear out the facts about the British pound. Also known as ‘Cable’, the currency pair holds 9.6% out of total daily forex transactions, what makes it more interesting is that GBP/USD is highly correlated to the EUR/USD because the British economy is interconnected to the Eurozone economy. The strength of the GBP is decided on the following factors:
The dependency of currency on certain factors helps us understand what to monitor in news before we open any position in the forex market. Furthermore, if you see that the British pound is strong in the market then you will also see the news that the British economy is doing better and vice versa.
Takeaway
To understand currency pairs and the underlying dynamics, this article is just the tip of the iceberg. However, you now have understood the fundamentals of currency pairs and how they represent the magnitude of the economy and politics of that geographical region. There are around 128 currency pairs spanning around three different classes which are Majors, minors and exotics. For the start, we recommend you to closely understand the above -mentioned currency pairs. Once you will get familiar with the most traded currency pairs, you will gain a broad spectrum of knowledge to understand the remaining currency pairs.