There are many elements that set the global forex market apart, from its highly leveraged nature to the immense levels of volatility witnessed on a daily basis.
Interestingly, international currencies are also traded as pairs, in which the value of one is quoted directly against the other.
We’ll take a closer look at how this works below, while explaining the role that ‘major’ currency pairs play in the marketplace.
What is a Currency Pair?
When you look at currency pairs, the first listed asset is referred to as the ‘base’ currency, with the second known as the ‘quote’ currency.
In terms of the accompanying value, this indicates how much of the quote currency is needed to purchase a single unit of the base currency.
For example; if the price presented for the EUR/USD pair is 1.2500, this means that one Euro can be exchanged for $1.2500 US dollars.
Currency pairs are usually quoted based on their bid (buy) and ask (sell) prices. In simple terms, the bid price refers to the value that the forex broker will buy the base currency for, whereas the ask price describes the value at which a broker will see the base currency.
Exploring Major Currency Pairs
Not all currency pairs have been created equal, with the seven so-called “major” pairings accounting for 68% of the market’s total daily trading volumes.
The major currency pairs all feature the US dollar, pairing the greenback with the seven other major currencies (namely the USD, the Euro, the Japanese Yen, the British pound, the Swiss Franc, the New Zealand dollar, the Australian dollar and the Canadian dollar).
Of these, the aforementioned EUR/USD is the single most popular and widely traded pair, accounting for approximately 24% of all daily trades in 2019. This is the single most liquid pairing in the world, due to the level of demand that exists and the ease with which the asset can be bought and sold.
This rule generally applies to all major currencies, which are incredibly popular and highly liquid.
They’re also relatively stable, thanks to the strengths of the supporting economies and the consistently robust trade performance of developed countries such as the US, UK and the 27 EU member states.
As we can see, major currency pairs are characterised by high levels of liquidity and underlying economic stability. They’re also categorised according to the volume that is traded on a daily basis for each pair. Here are the top four major pairs according to this metric:
- EUR/GBP: We’ve already touched on the dominance of this major pair, while the EUR/GBP currently represents the world’s two biggest economies (the EU and the US). It’s increased liquidity also translates into tight spreads that allow for high volume trading without triggering sustained volatility in the market.
- USD/JPY: Also known as the gopher, the USD/JPY pair comprises the US dollar and the Japanese yen. It’s a highly liquid and incredibly stable currency pair, while it’s also the second most traded forex asset in the world (accounting for 13.2% of all currency transactions in 2019).
- GBP/USD: Known colloquially as the ‘cable’, the trans-Atlantic GBP/USD pair made up 9.6% of all daily fx transactions back in 2019. Like most major pairs, its strength is largely derived from the relative strength of the UK and US economies, although the pound has traded in an increasingly narrow range against the dollar since the Brexit vote in 2016.
- AUD/USD: The fourth largest currency pair by trading volume is the AUD/USD (or the Aussie), accounting for 5.4% of daily trades in 2019. Unlike most other major currencies, the value of the AUD is tied directly to the value of its various exports, making it vulnerable to factors such as supply and demand and prone to significant shifts against the greenback.
