What Are Currency Pairs?
Currency pairs combine the currencies of two countries. Each currency has a value and the relationship of those values contributes to the price of the pairs. So does trader interest.
Currencies are always traded in pairs because when you buy or sell one currency, you automatically sell or buy another. (E.g., think about paying U.S. dollars when buying foreign currency for a trip abroad.)
In every currency pair, there is a base currency and a quote currency. The base currency is the first currency shown, on the left. The quote currency is the second currency, on the right.
The price for a currency pair is the amount of the quoted currency required to purchase one unit of the base currency.
So, for example, with the EUR/USD currency pair, EUR is the base currency and USD is the quote currency. A currency pair price of 1.2000 means that 1.20 U.S. dollars are needed to buy one euro, or one euro is worth 1.20 U.S. dollars.
Key Takeaways
- The Bank for International Settlements publishes rankings of the most highly traded currency pairs every three years.
- Currencies are always traded in pairs, with one currency being the base currency and the other the quote currency.
- The euro and U.S. dollar (EUR/USD) are the most popular currency pair.
- The six currency pairs listed offer traders good liquidity and tight spreads.
- Factors such as trade relationships, a nation's economic health, and interest rate changes can affect the pricing of currency pairs.
Forex Trades 24 Hours a Day, 5 Days a Week
Foreign exchange (forex) traders have the luxury of more highlyleveragedtrading with lowermargin requirements compared to traders inequity markets. But before you jump headfirst into the fast-paced world offorex, you'll want to know about thecurrency pairsthat trade most often.
Here's a look at six of the most traded currency pairs in forex, with rankings based on the 2022 triennial survey by the Bank for International Settlements (BIS).
1. EUR/USD: Trading the "Fiber"
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The most traded currency pair is theEUR/USD, most likely because of the global prominence of the economies of the European single market and the United States. It made up 22.7% of overall market share, as of the latest BIS survey. That's down from 24% market share in the previous 2019 survey. The high daily volume and liquidity of this pair ensure tight spreads for traders.
The EUR/USD tends to have a negativecorrelationwiththe U.S. dollar and Swiss franc (USD/CHF)and a positive correlation with theBritish pound/U.S. dollar (GBP/USD). This is due to the positive correlation of theeuro, the British pound,and the Swiss franc.
2. USD/JPY: Trading the "Gopher"
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The next most actively traded pair was theUSD/JPY, with high liquidity and a market share of 13.5%, slightly higher than its prior 13.2%. This pair has been sensitive to political sentiment between the United States and the Far East.
It tends to be positively correlated to theUSD/CHFandthe U.S. dollar/Canadian dollar (USD/CAD)currency pairs. This relationship isdue to theU.S. dollarbeing thebase currency in all three pairs. USD/JPY also responds to changes made to interest rates by the Bank of Japan and the effect on the yen relative to the U.S. dollar.
3. GBP/USD: Trading the "Cable"
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Trading in theGBP/USDcurrency pair represented 9.5% of forex market share, a small decrease from the prior survey in 2019. Again, the popularity and volume of trading in this pair reflect the strength of the British and U.S. economies.
The GBP/USD tends to have a negativecorrelationwith theUSD/CHFand a positive correlation with theEUR/USD. This is due to the positive correlation between the British pound sterling, theSwiss franc, and theeuro.
4. USD/CNY: Trading the Yuan
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TheUSD/CNY currency pair represents the relationship between the U.S. dollar and the Chinese renminbi, more commonly known as the yuan. Its market share grew to 6.6% from its previous 4.1% of market share in daily forex trades.
The U.S.-China trade relationship has been a volatile one, providing USD/CNY traders with plenty of speculative trading opportunities. Those interested in the USD/CNY should maintain awareness of developments in that relationship, as they could affect the pricing of the pair.
5. USD/CAD: Trading the "Loonie"
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Market share for the USD/CAD currency pair increased to 5.5% from 4.4% in the previous survey three years ago. Interest rates in the U.S. and Canada will affect the price of this pair, reflecting the effects on the individual currencies. In addition, as oil is a major economic driver for Canada, its price will affect the price of Canadian currency. This in turn can have an impact on the currency pair.
TheUSD/CADtends to be negativelycorrelatedwith theAUD/USD,GBP/USD,andEUR/USDpairs due to theU.S. dollarbeing thequote currencyin these other pairs.
6. AUD/USD: Trading the "Aussie"
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TheAUD/USDcurrency paircaptured 5.1% of forex market share, compared to its previous 5.4%. It tends to have a negativecorrelationwith the USD/CAD, USD/CHF, and USD/JPYpairs due to the U.S. dollar being thebase currencyin these cases.
The value of Australia's currency is closely tied to the role and value of its exports in its economy. Therefore, a downward movement in that value could affect the AUD/USD currency pair value, strengthening the dollar to the loonie. The relationship between the interest rates set by the respective central banks can affect the currency pair price, as well.
The forex market gives all traders, including retail investors, the potential to make money trading currency pairs. Understanding the fundamentals that drive currency pair pricing is essential to your success.
Why Is the EUR/USD Called the Fiber?
It's considered by many to be a an innovation update on the nickname "Cable" given to GBP/USD due to the steel cables laid across the seabed of the Atlantic Ocean in the 19th Century to facilitate communications between the U.S. and Great Britain. In other words, then it was cables, now it would be fiber optics.
Why Is the EUR/USD the Most Popular Currency Pair?
The U.S. currency is the most actively traded currency in the world. The euro is also highly traded. The reason for this is the perceived stability and strength of their economies and political environments. Because of this, the currency pair is the most viable for trading purposes.
Why Do Many of the Top Currency Pairs Include the USD?
Such pairings occur because of the strength of the economy plus the power and stability of the government that backs the U.S. dollar.
The Bottom Line
Our list of the most actively traded currency pairs starts with the EUR/USD, which has the greatest trading volume. All six currency pairs offer the liquidity that investors who trade them need for profits.
However, various factors such as trade relationships, changing interest rates, economic upheaval, and country disputes, including war, can affect individual currencies (and thus pairs). So make sure that you're up to date on such news and information before leaping into the forex market so you can choose the most viable currency pairs to trade.
