“A currency pair compares two national currencies with the value of one currency being quoted against another. These currency pairs are available to trade in the forex market, the world’s most liquid financial market.”
The forex market is divided into two types of trading currency : currency pairs and cross-currency pairs. These currency pairs have a base currency, mainly quoted against the second currency in the pair.
The second currency is called quote currency. Here are the most common currency pairs, EUR/USD, USD/JPY, and GBP/USD. The majors of the EUR/USD, GBP/USD, and the USD/JPY are because these monthly trading volumes are the highest in the forex market. To make things convenient, you should know what currency pairs are affected by NFP, let us know about it.
What are Currency Pairs?
Currency pairs are the building blocks of forex trading, and understanding them is crucial for any trader. These currency are currencies traded against each other in the forex market.
When you buy or sell a currency pair, you essentially buy one currency and sell another currency simultaneously. The trading volume of a currency pair is determined by how much it is bought or sold in the market.
Forex traders use currency pairs and make speculation on the movements of exchange rates between different currencies and make profits from their trades.
With a prosperous understanding or guidance on how currency pairs work, traders can better understand the risks associated with trading and make more informed decisions when investing in the forex market.
Key Takeaways
- A currency pair can be said as a combination of two currencies that can compare against each other.
- While placing an order of currency pair, the base currency is bought, and the quote currency is sold.
- EUR/USD is the most liquid currency pair in the world, and USD/JPY is the second most liquid currency pair.
- Several factors can affect currencies’ prices, including economic and political elements.
Understanding Currency Pairs
The trading of currency pairs is conducted in the forex market, the highest liquid market worldwide. This liquid market allows users to buy, sell, exchange, or speculate about the crypto market.
This forex market is generally open 24 hours, five days a week. During this period, we can see a considerable amount of trading volume. When buying a currency pair, an investor buys a base currency and sells quoted currency. The bid price of the currency pair represents the requirement of quoted currency to receive one unit of the base currency.
In contrast, selling currency pair means the investor is selling the base currency and buying quoted currency. .
Major Currency Pairs
The widely used currency pair is Euro against the US dollar, mainly known as EUR/USD. It is the most liquid currency pair in the world because it is heavily traded in the forex market. The quotation of EUR/USD is equal to 1.25. It means that investors will get 1.25 USD in exchange for one Euro. Here, Euro is the base currency, and USD is the quoted currency.
Just like this currency pair, many currency pairs are traded regularly. Therefore, all the currency pairs are categorized according to volume. Below, we have given a list of major currency pairs highly traded in the market. All the currencies traded against the US dollar are considered significant currencies.
- EUR/USD
- USD/JPY
- GBP/USD
- USD/CHF
- AUD/USD
- USD/CAD
These are the major currency pairs; commodity currencies are the last two, which are affected by NFP data. Australia and Canada are rich in commodities, so their prices will affect both countries.
Minor Currency Pairs
The currency pairs not associated with the US dollars are termed Minor. Users not trading against the US dollar will come under Minor currency. These are less liquid currency pairs as compared to others. Some of the prominent examples of Minor Currency pairs are-
- EUR/GBP
- EUR/AUD
- GBP/CAD
- NZD/JPY
- CHF/JPY
How to Trade Currency Pairs?
Currency trading is an exciting idea to diversify your portfolio and make substantial profits. It involves trading one currency for another to take advantage of fluctuations in exchange rates.
These currency pairs include all the major currencies, such as the US Dollar, Euro, Japanese Yen, British Pound, Canadian Dollar, and Australian Dollar.
Trading currency pairs requires deep Analysis and knowledge of the markets. You must know all the market trends to identify potential profit opportunities.
Additionally, you must understand how different factors can affect each currency pair’s value. With this knowledge, you can make better decisions for selling a particular pair.
Technical Analysis
Technical Analysis requires understanding past trend movements and planning certain things to predict future actions.
The indicators will be insightful in making informed decisions. Traders can increase their chances of making a profit with technical Analysis.
Fundamental Analysis
The fundamental Analysis includes research on the aggregate economic data and the upcoming strategies that could change the price. It plays a crucial role in changing the price of any currency, and several factors can influence its price.
Trading currency pair requires a good mindset level; you should know when to take entry and when to exit the market.
Top Factors influencing Currency Pairs
Below, we have covered some important factors influencing currency rates. So, let us know about those factors.
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Inflation
Inflation is one of the biggest reasons that can influence the exchange rates. A country with a lower inflation rate shows a rise in its currency value. It is because the currency will have more purchasing power than other countries.
Meanwhile, those countries with high inflation rates will face depreciation in the price of their currency. One of the main reasons for high inflation rates is its high-interest rates.
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Terms of Trade
The terms of trade are related to the export price and import price; it is highly responsible for influencing the rate of currency pairs. Now, if the price of export rises over imports, it means that terms of trade work favorably.
It indicates that the demand for a country’s product increases, increasing the currency’s price. While if import exceeds exports, the price of the currency will depreciate, which is one of the main reasons for influencing the price of the currency pair.
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Interest Rates
The interest rates and currency values are highly correlated to each other. The change in interest rates has a clean impact on currency value. The high-interest rates give the lender the benefit of getting more interest rates. Infect, higher interest rates also attract foreign investors to lend their capital.
It leads to high currency value, while if any country has higher inflation than others, it will depreciate its value. The conclusive evidence is that low-interest rates also decrease the value of a currency.
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Public Debt
Public debt dramatically influences the value of any currency. When the public debt of any country increases, it leads to an increase in the value of its currency. It is because the investors will take more interest in investing in countries with high public debt levels, as they provide more assurance for their investments.
On the other hand, if the public debt of any country decreases, it can reduce the value of its currency because investors will be less likely to invest in countries with low public debt levels. Therefore, changes in public debt can have significant impacts on currency values.
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Current Account Deficit
The Current Account Deficit (CAD) is an essential economic aspect that can severely impact exchange rates. It is the main difference between a country’s total imports and exports of goods, services, and transfer of payments.
A high CAD leads to a weakening currency in the forex market. As it indicates that more money is being spent abroad than earned from exports. It can result in an appreciation of foreign currencies relative to domestic ones, leading to increased import costs and decreased export values.
Subsequently, it is essential for all countries with large current account deficits to monitor their CADs and take necessary measures.
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Political Stability and Performance
Exchange rates affect various factors, including political stability. Political instability in a country can bring economic and financial uncertainty, affecting its currency’s value. For example, when there is political turmoil, investors may become worried about investing in the country’s economy, causing the exchange rate to fall.
On the other hand, when a country has a stable government and policies that promote economic growth, investors will take more interest in investing in it, and its currency will appreciate.
Therefore, countries must maintain political stability if they want their currencies to remain strong against other countries.
Conclusion
The currency market mainly deals with all the major world currencies like the US dollar, Euro, Japanese yen, and UK pound. However, the trading currency market also includes major international currencies like the Canadian Dollar, Australian Dollar, and Swiss franc.
The currency pairs listed on a forex chart will reflect the price of currencies being traded and the price at which those currencies are trading. In addition, we want you to understand what currency pairs are affected by NFP and the factors influencing their rates.
FAQs
Q. What are currency pairs?
Ans. A currency pair is a combination of two currencies which quotes each other. The first currency is known as the base currency, and the second currency, whose quoted value, is called quoted currency.
Q. What are major currency pairs?
Ans. The major currency pairs are the widely used pairs on the forex market. Such pairs are EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, and USD/CAD. These trading currencies pair trades and play a massive role in significant economic transactions.
Q. How do these currency pairs work?
Ans. The currency pairs indicate the value of base currency over quoted currency. Here, the currency code indicates how much quote currency requires for base currency. A person has to buy one currency in exchange for another, and the difference between the price is known as spreads by pips.
