Learning the characteristics of currency pairs will help you understand the pattern of price movement that will help your analysis. Here are the characteristics of the four major pairs in forex trading.
Currencies in the forex market are traded in pairs. Each currency has different forces behind it, as its country of origin too, has different characteristics. The mix of these characters is what will make prices move higher or lower. To gain profits from trade, the first thing we should do is learn their characteristics. Thus, this article is going to talk about some of the most traded currency pairs.
Characteristics of EUR/USD
- Average daily range: 100 pips
- Affecting central banks: European Central Bank (ECB) and Federal Reserve (the Fed)
- All-time High (as of May 2023): 1.6038 on January 2008
- All-time Low (as of May 2023): 0.5365 on January 1971
According to the latest BIS Triennial Survey released in September 2013, EUR/USD is the most traded pair at an average of 24.1% a day. It is an actively traded pair with moderate volatility which makes it compatible with either scalping or day trading. There are always enough movements to take daily profits, especially at times around the release of fundamental news.
Euro is the currency used by the European Union and served as the national currency in 19 of 28 EU countries. Euro is the second biggest currency in the world after USD, despite not all of the EU members adopting it. It was adopted only by Austria, Belgium, France, German, Netherlands, Greek, Italy, Spain, Ireland, Luxembourg, Malta, Portugal, Slovakia, Slovenia, Cyprus, Estonia, Finland, and Latvia.
The euro currency is extremely sensitive to economic growth. As the main user of the Euro is an ion of countries with differing economic views and powers, their growth has been constrained by unresolved financial woes. When you trade EUR, you have to observe the dynamics of the Eurozone, mainly Germany. Apart from that, you should always check on what the European Central Bank (ECB) says or do. Euro, as is any other currency, is very easily influenced by the central bank's policies and orientations.
USD, the United States of America's currency, by itself, is the most traded currency in the world. Of course, the USD is the world's reserve currency, so it is very influential. As opposed to the Euro that's sensitive to growth, the greenback is susceptible to changes in commodities prices like crude oil.
The US imports commodities to make its economy keeps revolving, and so, commodities price changes have an immediate effect. Besides, announcements from its central bank, the Federal Reserve of America (The Fed), could change trend movement for quite a long period.
Characteristics of USD/JPY
- Average daily range: 157 pips
- Affecting central banks: Federal Reserve (the Fed) and Bank of Japan (BoJ)
- All-time High (as of May 2023): 358.44 on January 1971
- All-time Low (as of May 2023): 75.57 on January 2011
USD/JPY is the second most traded pair aside from the EUR/USD. The Yen was famous as a safe-haven currency, although it has diminished in recent times as Japan struggles to lower its exchange rates. However, as Japan is one of the most stable countries in the world with a relatively steady growth projection, many investors still admire its strength and flock to the Japanese Yen whenever the market turns into turmoil.
Trading USD/JPY means that we have to pay attention to policy changes from both countries, especially monetary policy changes from their central banks: the Fed and Bank of Japan (BoJ). For the time being, BoJ has priority in low JPY to boost exports and economic growth, therefore its trading risk is considerably high. Also, Japan's industrial/manufacturing data are moderately influential toward Yen.
Characteristics of GBP/USD
- Average daily range: 136 pips
- Affecting central banks: Bank of England (BoE) and Federal Reserve (the Fed)
- All-time High (as of May 2023): 2.6440 on January 1972
- All-time Low (as of May 2023): 1.0354 on January 2022
GBP/USD has been the third most traded pair in the BIS survey. The pair is famous as one of the most volatile trades in the financial market. It is not advisable for beginner traders to trade this currency, as prices tend to move so fast it could give us whiplashes. In a few minutes, the price could move 100 points or more. Even more so when there are high-impact news releases.
The key that unlocks growth in the UK economy is consumer spending. That's why employment reports, retail sales, and housing sales data are very influential toward the pound sterling. The UK's central bank, the Bank of England (BoE), has a relatively lower influence than the Fed. Nevertheless, you should also consider their decisions when trading this pair.
Characteristics of AUD/USD
- Average daily range: 87 pips
- Affecting central banks: Reserve Bank of Australia (RBA) and Federal Reserve (the Fed)
- All-time High (as of May 2023): 1.4885 on January 1973
- All-time Low (as of May 2023): 0.4778 on January 2001
The fourth most traded currency, AUD/USD, could give you more enjoyable trading. Its price movement is approximately half that of the EUR/USD and only 3/4 of GBP/USD. There are several determinants in AUD/USD trading and one of the most important is China's economy.
You may wonder, what does China do in Australian and US currency trade? Well, China is quite influential in both countries, more so in Australia. The vast growth of Australia could be contributed to the high demand for mining and agricultural products from China. And so, the ups and downs of China's GDP, as well as projections in the manufacturing and other industries, have a strong impact on AUD/USD.
Once again, we should note that the central bank is important. The Fed, for sure, and The Reserve Bank of Australia (RBA). RBA's decision to lower interest rates has been known to instantly drag the Australian Dollar down.
Characteristics of USD/CAD
- Average daily range: 105 pips
- Affecting central banks: Federal Reserve (the Fed) and Bank of Canada (BoC)
- All-time High (as of May 2023): 1.6184 on January 2002
- All-time Low (as of May 2023): 0.9059 on January 2007
Canada is not an especially dominant economy, but they do have a balanced and relatively stable economic condition. When the US market fell into a financial crisis, Canada across the border was able to stay calm. That's why more and more investors are holding the CAD as a minor safe haven. USD/CAD is even regarded as the fifth most traded pair in the world according to the BIS survey in 2013.
Canada and the US live side by side in the same region, and it makes the USD/CAD relatively difficult to predict as US policies could affect its neighbor. What surely affects them is the difference between Canadian and US interest rates, as the interest rate is one of the benefits of holding a certain currency. Monetary policies released by the Bank of Canada and the Fed, therefore, easily influence USD/CAD.
Prices of commodities, too, as in the case of USD, heavily influence CAD. In any other factor, however, the influence of CAD is less pronounced.
Characteristics of USD/CHF
- Average daily range: 90 pips
- Affecting central banks: Federal Reserve (the Fed) and Swiss National Bank (SNB)
- All-time High (as of May 2023): 4.3180 on January 1971
- All-time Low (as of May 2023): 0.7070 on January 2011
USD/CHF trading constitutes 3.4 percent of total daily volume (BIS, 2013), which makes it the sixth most traded pair in the world. It is the least popular among major pairs since the bid/ask spread for the pair is often wider than any other pair.
However, considering that Switzerland is such a small country (compared to other countries in the major pair list), it is quite an impressive feat. How could it be?
Well, the Swiss Franc is also known as a safe-haven currency due to Switzerland's economic stability and conducive financial system.
The fundamentals influencing USD/CHF mainly are US economic reports. Switzerland itself, and its central bank (Swiss National Bank/SNB) are seldom quoted by the press.
Another factor that we should note is that CHF is closely related to EUR and GBP due to geographical factors, so the USD/CHF tends to move in the opposite direction of EUR/USD and GBP/USD.
Characteristics of NZD/USD
- Average daily range: 80 pips
- Affecting central banks: Reserve Bank of New Zealand (RBNZ) and Federal Reserve (the Fed)
- All-time High (as of May 2023): 1.4900 on January 1973
- All-time Low (as of May 2023): 0.3900 on January 2000
NZD/USD might be the least traded major pair. It is highly influenced by the US economy, as well as New Zealand's economic reports. Reserve Bank of New Zealand (RBNZ) statements, especially in regard to interest rates, easily influence the pair. Apart from that, New Zealand's GDP and inflation rate also have a high impact on the New Zealand Dollar.
Trivia: Cross Currency
Those are the last of eight major pairs. You may notice that all of them are traded against USD. Do all currencies in forex have to be traded with USD? Of course not.
It is just that the USD is the most widely used currency and major pairs are available in most brokers, so trading with it is more comfortable for many people. But actually, there are cross currencies too, that is currencies that are traded without including USD.
Most traded cross currencies involve JPY, which are AUD/JPY, GBP/JPY, EUR/JPY, and so on. The reason is that trading against JPY creates interest rate gaps which could result in more profits.
Another most traded cross currency is EUR/GBP. Both represent some of the largest economies in the world, so it makes sense that many people trade them.
However, cross currency pairs relatively have small daily movements compared to major currencies, and so forex traders usually ignore them.