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The foreign exchange market or ‘forex market’ is by far the most liquid market in the world, with trillions of dollars in daily volume. This is one of the main benefits of Forex trading, as you have access to high liquidity and trading volumes; this means that Forex brokers such as FP Markets can offer you tight spreads as low as 0.0 pips on some pairs, making your effective trading costs much lower. It’s not always clear which are the top forex pairs to trade for your trading strategy; this article aims to give you an idea regarding the more widely traded pairs and how they might present trading opportunities to you in the current economic climate.
EUR/USD sometimes nicknamed the ‘fibre’, is one of the major currency pairs, usually the most traded currency, pair making it one of the best currency pairs for forex traders that are looking for liquidity. With the euro as the base currency and the US Dollar as the quote currency - or in other words, the rate represents how many dollars are required to buy one euro. This currency pair is great for forex traders using strategies such as technical analysis as the high liquidity and frequent volatility create frequent trading opportunities. As is relevant when trading any currency, it’s important to understand the dynamics between their interest rates, which are set by the European Central Bank (ECB) for the Euro and the Federal Reserve (or ‘the Fed’) for the US Dollar as well as fundamental economic data such as inflation rates, GDP figures, trade balances and geopolitical news coming from the US or Europe.
USD/JPY expressing the US Dollar in terms of Japanese Yen - is a highly traded pair, supported by the strong economic ties between Japan and the US. It’s important to keep in mind that while the exchange rate is mostly free-floating, the Japanese Yen is technically under a ‘dirty float’ regime where the central bank of Japan will sometimes intervene in the currency market to maintain the stability of the Japanese yen. The pair is also frequently sensitive to risk sentiments in the global economy, as the Japanese Yen is considered a ‘safe haven’ currency.
Sometimes dubbed ‘the cable,’ GBP/USD is another major currency pair expressed as the value of the British Pound Sterling in US Dollars. The pair has high trade volumes, deep liquidity and frequently tight spreads. The US and the United Kingdom have a long and proven track record of economic strength and political ties. What usually causes price movements in this currency pair is fundamental economic data such as GDP, Inflation and Unemployment, monetary policy decisions, and other geopolitical events.
USD/CNY is the value of the US Dollar expressed in terms of Chinese Yuan. The pair is highly traded, owing to the vast amount of trade between the two economies. Despite this, the two countries have strained geopolitical relations, which can create volatility and opportunities for discerning traders. It’s also important to note that the exchange rate is not entirely free-floating between the two currencies, as China has a managed exchange rate system where China’s central bank, the People’s Bank of China (PBOC) set a reference rate for the pair. They intervene by either purchasing large amounts of Chinese Yuan using foreign currency reserves if they wish to raise the exchange rate or by selling large amounts of Chinese Yuan if they wish to lower it. While all these factors can create risk for the currency pair, they also present opportunities. When you consider that the pair is still highly liquid (therefore offering lower spreads), it could be a brilliant currency to trade, especially for those using fundamental analysis.
USD/CAD, nicknamed the ‘Loonie’, is the exchange rate between the US Dollar and Canadian Dollar. Canada and the US are neighbouring nations with very strong trade relations, with the US being the destination for over 70% of Canada’s exports in 2021. This currency pair is heavily affected by fluctuations in the price of oil, as Canada is a major producer and exporter of crude oil, most of which is exported to the US.
AUD/USD or ‘the Aussie’ is the pair of the Australian Dollar expressed in terms of the US Dollar. The Aussie is generally considered a ‘commodity’ pair as much of Australia’s exports revolve around iron, coal, and gold. This means that the exchange rate will frequently be affected by the prices of these commodities. If you plan on trading the Aussie, it’s important to keep your eye on the commodity prices.
The USD/CHF, or the ‘Swissie’ among some traders, is the exchange rate between the Swiss Franc and the US Dollar. The Swiss Franc is another ‘safe-haven’ currency and can often be seen to appreciate during times of economic uncertainty. The Swiss National Bank (SNB) also occasionally intervenes in the market, usually to prevent the Swiss Franc from sharp appreciations that could hurt the competitiveness of their exports in global markets. Like any other currency pair, the Swissie is affected by monetary policy decisions from the SNB and the Fed, as well as important economic data like GDP, inflation, and consumer sentiments.
USD/HKD is the exchange rate between US and Hong Kong Dollars. As a Special Administrative Region of China, Hong Kong’s currency movements are often caused by political news related to Hong Kong’s autonomy and governance. The pair is also largely defined by the currency peg maintained by Hong Kong’s central bank; the Hong Kong Monetary Authority (HKMA). The peg has a specific range, allowing it to trade between 7.75 and 7.85 Hong Kong Dollars Per US Dollar before the HKMA intervenes in the exchange rate. This means that extreme volatility in the currency is reduced as it can only move within the pegged range. Hong Kong also has the unique aspect of being one of the world’s top financial hubs, meaning it receives large capital inflows from foreign investors. Because of how important Hong Kong’s status is as a financial hub, it’s always important to understand what events are going on in Hong Kong’s financial markets, such as large IPOs.
EUR/JPY is a cross-currency pair representing the Euro and Japanese Yen. As previously mentioned, the Japanese Yen is a safe haven currency, and sensitivity is shown even more in the EUR/JPY pair as the Euro - unlike the dollar - is not considered a safe-haven currency. This can make the EUR/JPY a good gauge for global risk sentiments. The EUR/JPY is also going to be affected by the interest rate differential between the two currencies, with increased interest rates usually causing one currency to appreciate as the return for holding that currency is now more lucrative. As always, consider the underlying economic fundamentals of each currency.
EUR/GBP, or the ‘Chunnel’ as some traders call it, is another cross-currency pair. The pair has significant interest due to the close proximity and economic relationship between the UK and Eurozone. Often traders might use this pair as a way of diversification, as the Chunnel might move differently to other major currency pairs, offering a counterbalance in one’s currency portfolio. Some traders also use it as a hedge for European-based portfolios. The political relationship between the UK and Eurozone has also been a frequent provider of trading opportunities and volatility as well as changes in trade policies and negotiations post-Brexit.
These are just a few popular currency pairs that may be suited to you and your trading needs and risk profile, the Forex market is vast with many options to choose from including exotic pairs and more. Each of the currencies mentioned here is available to trade with tight spreads with FP Markets. Remember, if you are a beginner trader, you should try a demo account and test your trading strategy before trading currencies live.
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