The forex market is one of the world’s biggest markets. Period. You can trade currency pairs from each corner of the world. However, there are a handful of pairs that are worth mentioning: more traded than any other currency pairs, the ‘majors’ dominate the forex market.
The ‘majors’: the four most popular currency pairs
The four most traded currency pairs in the world have been coined the ‘majors’. They involve the following currencies: euro, US dollar, Japanese yen and pound sterling. The most popular pairing is the EUR/USD, followed by the USD/JPY, GBP/USD and USD/CHF pairs respectively.
The EUR/USD, or more informally known as ‘Fiber’, is the world’s most popular forex pair. This is hardly surprising considering the US and the EU are the world’s two largest economic entities. The US dollar is the most widely held and traded currency in the world, comprising around 87% of all trades. The euro, the currency of the European Union, is the second most traded currency, comprising around 31% of all trades. As may be expected, the EUR/USD is consequently the most traded currency pair offered in the forex market.
Japan ranks as the third largest economy in the world, and is a significant global exporter. Due to Japan’s large amount of trade around the globe, there is a regular need for multinational corporations to convert their domestic currency into Japanese yen. Historically, Japan has had a consistently low interest rate, making it a popular currency for the carry trade. The Bank of Japan has also been known to employ controversial monetary policy, such as negative interest rates, to keep its economy under control. These factors all contribute to what makes the USD/JPY pair so popular in forex markets.
The UK is one of the globes largest economies, despite its small landmass. Consequently the pound sterling plays an important role in the international financial markets, and the GBP/USD is a widely traded currency pair. One of the most crucial factors that affects the value of the GBP/USD pair is the relative strength of the respective economies. The stronger economy tends to be related to a strong currency, so when the UK is outperforming the US, the GBP/USD tends to rise. Both the US and the UK have globally prominent financial hubs, so the performance of each country’s financial sector naturally moves the GBP/USD pair.
Switzerland has a reputation as a safe and prosperous nation; it has maintained a foreign policy of military neutrality since the Treaty of Paris in 1815. The economic reputation of Switzerland is enhanced by the secrecy of the Swiss banking sector, and to this day Switzerland remains a hub of private banking and investment management. It is due to this history of political neutrality and reputation for discreet banking that leaves an important role for the Swiss franc in international markets. The Swiss franc is somewhat of a safe haven in times of international turmoil, whether that be political or financial.
The commodity pairs
There are a few other currencies that deserve to be mentioned. Informally known as the ‘commodity pairs’, the AUD/USD or ‘Aussie’, USD/CAD and NZD/USD are all frequently traded currency pairs. Unsurprisingly, this group of currencies derives its nickname from the fact that they come from countries that possess large quantities of natural resources.