The most traded and most liquid pairs have the US dollar as a minor currency and are called major currency pairs. The US dollar accounts for more than 95% of the foreign exchange market states the most traded and the most liquid currency pairs as following:
• US Dollar (USD) and British Pounds (GBP) - GBP/USD
• Euro (EUR) and US Dollar (USD) - EUR/USD
• Japanese Yen (JPY) and US Dollar (USD) - USD/JPY
• Swiss Franc (CHF) and US Dollar (USD) - USD/CHF
Taking the main currency like the US dollar, the euro, the Japanese yen or the British pound and comparing it to each other, we get something that is known in the market as 'FX pairs'. It is a growing market where traders prefer to buy or sell a currency for a 'regular rate' rather than sell it for a better rate, resulting in a rise or fall in value the next day or week. Currency pairs are most active when the sessions for their region are active and can be traded online at any hour of each weekday. Traders of FX pairs need to pay attention to every announcement, news or any other valuable information to determine which factors could affect the growth or decline in currency value. For example, monitoring one of the most popular FX currency pairs, such as GBP/USD, then the trader should follow the UK announcements. Data such as a fall in unemployment or an increase in interest rates in the UK are all factors that would normally strengthen the pound. It is also worth paying.
EUR vs USD
The US dollar and the Euro are two of the most significant and best-known currencies in the world. The EUR/USD currency pair has globally the largest trading volume and is, therefore, the most traded currency pair. This pair cannot be overlooked because of its daily volatility and price movement.
US Dollar (USD) and Euro (EUR) are the official currencies of the respective US economic zones and countries in the European Union. The FOMC (Federal Open Market Committee) is the Federal Reserve Department (FED) that determines the direction of monetary policy for the US, which in turn affects the value and perceived value of the US dollar. The European Central Bank (ECB) is the main central bank for the euro and the eurozone and the impact on currency is similar. Both currency pairs are part of the FOREX exchange market. In the Forex market, the price of one currency moves up, down, or side to another currency. Both EUR and USD also generate currency pairs with other currencies such as the Euro against the British Pound (EUR/GBP) or the US Dollar versus the Canadian Dollar (USD/CAD).
When the price of the euro-dollar increases from 1.15 to 1.17, the euro becomes more valuable and the USD becomes less valuable.
• When the price of the euro-dollar falls from 1.22 to 1.19 the euro becomes less valuable and the USD becomes more valuable.
• In the opposite case, movements of USD/EUR are alike, when the USD versus the euro increases, the USD becomes more valuable. It is important to note that this version of the abbreviation is not common.
When the price moves up or down, it means that one currency becomes stronger or the other weaker, or even both. If the EUR/USD exchange rate is higher, it could mean that the euro is strengthening against the US dollar, or that it may weaken the US dollar - or both. No matter what price change is, the fact is that traders can monitor the current balance of power by simply tracking price movements on the euro-dollar currency pair. Euro-dollar is either listed by the broker at 4 decimal places, which is 0.0001 pip, or some brokers are able to list EUR/USD at 5 decimal places, 0.00001 pip. An example is the Euro-dollar exchange rate, with EUR/USD fluctuating at an average of 87 pips a day from the beginning of the year on 30 August 2018 -this represents many business opportunities for EUR/USD traders. Where volatility is an important factor because there is no movement on FOREX without volatility. Volatility is often associated with risks, but the trader must not forget that it also can easily turn into opportunity! These opportunities can be risky if the trader applies risk management and when the business strategy is poorly planned. On the other hand, for a trader who follows risk management and has a well-established business plan, trading EUR/USD can become a very rewarding activity.
USD vs JPY
The couple dollar-yen is the second most liquid currency pair in the world. The Japanese Yen denotes the third major international currency and represents the globe’s second largest economy in the account of its GDP, after the United States. The interest rate differential between the Federal Reserve (Fed) and the Bank of Japan (BoJ) affects the value of USD/JPY when compared to each other. Additionally, correlations between the U.S. and Asian equity markets are a key determinant of the exchange rate. The dollar-yen pair has a positive interrelationship with the USD/CHF along with USD/CAD currency pairs as they both conclude the U.S. dollar as the base currency. USD/JPY has the largest range of traders among the majors and also tends to trade with a higher degree of volatility across all trading sessions. The pair USD/JPY is extremely liquid and it has a tendency to move around a particular price level before there is a sudden rapid movement to a different price level. A trader who wishes to trade USD/JPY pair has to pay attention to the daily or monthly Yen price chart to observe the overall trend of the currency in order to determine in which direction it might move. Since Japan's exports are all contracted in U.S. dollar, strong yen with an upper hand over U.S. dollar has the potential to cause profit difficulties for Japanese exporters. In the case, the yen would sustain its strength, it would mean a delay for Japan’s efforts to meet its 2 percent inflation target. Japan has the smallest share of its denominated exports in its industrialized countries.
Currency crosses are those pairs that do not include US dollar. They account for only about 12% of the daily turnover. Examples of most traded currency crosses are EUR/GBP, EUR/JPY and EUR/CHF.
Exotic currency pairs
Exotic currency pairs are made of US dollar paired with minor currencies, which are often currencies of emerging markets. Combination of wide spreads, lower liquidity and volatile price swings make these pairs unpopular for most traders.
Typically currency pairs on an interbank market are quoted to four decimal places. A pip is the smallest price movement of a currency pair and is expressed as one ten-thousandth of one unit of a currency. Currency pairs that contain Japanese yen as their quote currency make an exception, since they are quoted to two decimal places and thus one pip is equal to one-hundredth of a Japanese yen. Traders use pips to measure the size of a market move and in combination with lot size, traders can calculate potential profits.
When trading currencies, traders have to decide how much they want to buy or sell. Standard lot is equal to 100 000 units of the traded currency. Nowadays most retail brokers also offer the possibility of trading in mini lots, which are equal to 10 000 units of a currency and sometimes even micro lots, which are equal to 1 000 units of a currency. Calculating the value of one pip is helpful to gauge potential P/L of a trade. To calculate value of one pip we have to divide one pip by the exchange rate of the traded currency pair and then multiply it by our chosen lot size. For example when trading a standard lot of EUR/USD with exchange rate of 1,1291 the calculation will be following:
(0,0001/1,1291)*100 000 EUR = 8,8566 EUR
attention to when the government is taking measures such as quantitative easing - when it pours money into the economy to boost growth - because traders can find that a related currency weakens slightly.)