Credit: Original article by Bitget News
Title: A Deep Dive into Forex Currency Pairs: Understanding Majors, Minors, and Exotics
The foreign exchange market (Forex or FX) is the largest and most liquid financial market in the world, with a daily trading volume exceeding $7.5 trillion as of 2022. It involves the exchange of currencies between global participants, including banks, corporations, governments, and individual investors. Unlike stock markets that have centralized exchanges, Forex operates 24/5 over-the-counter (OTC), meaning trading occurs directly between parties in the global decentralized market.
To navigate the Forex market effectively, understanding the structure of currency pairs is crucial. In Forex trading, currencies are always quoted in pairs, with the value of one currency relative to another. For example, in the pair EUR/USD, the euro (EUR) is the base currency, and the US dollar (USD) is the quote or counter currency. If EUR/USD trades at 1.1000, it implies that one euro equals 1.10 US dollars.
Below is a comprehensive breakdown of the types of Forex currency pairs, including major, minor, and exotic pairs, each defined by its trading volume, market liquidity, and economic significance.
Understanding Forex Currency Pairs
Currency pairs are the foundation of the Forex market. Each pair comprises two elements:
– Base Currency: The first currency in the pair, which is the asset being bought or sold.
– Quote Currency: The second currency, which represents the value of the base currency.
The price of a currency pair indicates how much of the quote currency is needed to buy one unit of the base currency. For example, if GBP/USD is trading at 1.2800, it means 1 British pound is worth 1.28 US dollars.
All Forex currency pairs fall into three main categories:
1. Major Currency Pairs
2. Minor Currency Pairs
3. Exotic Currency Pairs
Major Currency Pairs
Major pairs are the most traded currency pairs in the world. Each one includes the US dollar (USD), which is the primary reserve currency globally and has the highest trading volume.
Major pairs are known for their:
– High liquidity
– Tight spreads (difference between the bid and ask price)
– Lower volatility compared to exotic pairs
– Competitive pricing from brokers
The most popular major pairs, often referred to collectively as “the majors,” include:
– EUR/USD (Euro/US Dollar): This is the most traded Forex pair and typically has the lowest spreads. It reflects the economic relationship between the Eurozone and the United States.
– GBP/USD (British Pound/US Dollar): Known as “Cable,” this pair is popular for its liquidity and volatility.
– USD/JPY (US Dollar/Japanese Yen): Areflection of trade and investment ties between the United States and Japan.
– USD/CHF (US Dollar/Swiss Franc): The Swiss franc is viewed as a safe-haven currency, making this pair attractive during times of market uncertainty.
– USD/CAD (US Dollar/Canadian Dollar): Often called the “Loonie,” influenced by commodities such as oil due to Canada’s resource-driven economy.
– AUD/USD (Australian Dollar/US Dollar): This pair is impacted by commodities like gold and iron ore, as Australia is a major exporter.
– NZD/USD (New Zealand Dollar/US Dollar): Also commodity-driven, notably by dairy and agricultural exports.
Minor Currency Pairs
Minor pairs, also called cross-currency pairs, do not include the US dollar. These pairs are often derived from combinations of other major currencies and serve to express the relative strength between the respective economies.
While not as liquid as major pairs, minors still see significant trading activity and can offer substantial opportunities for informed traders.
Common minor currency pairs include:
– EUR/GBP (Euro/British Pound)
– EUR/CHF (Euro/Swiss Franc)
– EUR/AUD (Euro/Australian
Read more on EUR/USD trading.