Although there are many currency pairs that can be traded on the Forex market, by most definitions there are just four major pairs. These are the most commonly traded pairs in the market and the most influential.
They consist of:
EUR/USD – Euro/ US Dollar
USD/JPY – US Dollar/ Japanese Yen
GBP/USD – British Pound Sterling / US Dollar
USD/CHF – US Dollar/ Swiss Franc
Some believe that the USD/CAD (US dollar/ Canadian dollar) and USD/AUD (US dollar/ Australian dollar) should also be counted as major pairs but most still consider these to be ‘commodity’ pairs. Other traded pairs are generally described as cross-currency or exotic pairs.
You will have noted that the USD features in each of the four major currency pairs. The currency enjoys a unique and important position in the Forex market and the world economy as we explained in Reasons that the US Dollar is King. It is involved in around 85% of the traded volume in a vast market where an average of $5.3 trillion is traded every day.
Despite China’s emergence, the USA and the European Union remain the two biggest economic entities. As noted, the USD is the most commonly traded currency. The euro, used by much of the EU (in countries collectively known as the ‘eurozone’ or, more properly, the European and Economic Monetary Union) is the second. This makes the EUR/USD the top traded currency pair in the Forex market. The primary influence for the direction of this pair is the relative strength of the two economies, although the euro also tends to fall when the frequent disagreements about the future direction of the currency arise between European governments.
Japan has the second largest economy in Asia (behind China) and is the third largest national economy measured in GDP, behind the USA and China. The Chinese yuan is not commonly traded on the open market, however, making the Japanese yen the most important currency in the crucial Asia-Pacific region.
Although small in landmass, the UK has the fifth biggest nominal GDP ranking for 2016, according to the IMF World Economic Outlook report. The GBP served as the world’s most common reserve currency before the USD took over the role (following WWII) and the UK’s position as a global financial centre also helps to keep the currency pair an important one.
Switzerland’s unique position in the financial markets is due to its discreet banking and historic political neutrality. It is also a trading partner with the rest of Europe without being part of the European Union. When there is upheaval elsewhere, the Swiss franc often rises as investors see it as a safe haven. It can be difficult to trade against the USD, though, which is also often seen as a ‘safe haven’ currency.