What Are Currency Pairs?

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.

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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.

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Foreign exchange (forex) traders have the luxury of more highly leveraged trading with lower margin requirements compared to traders in equity markets.

But before you jump headfirst into the fast-paced world of forex, you´ll want to know about the currency pairs that 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


1.

EUR/USD: Trading the "Fiber"
euro dollar
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The most traded currency pair is the EUR/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.2

The EUR/USD tends to have a negative correlation with the U.S.

dollar and Swiss franc (USD/CHF) and a positive correlation with the British pound/U.S.

dollar (GBP/USD).

This is due to the positive correlation of the euro, the British pound, and the Swiss franc.

2.

USD/JPY: Trading the "Gopher"
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The next most actively traded pair was the USD/JPY, with high liquidity and a market share of 13.5%, slightly higher than its prior 13.2%.2 This pair has been sensitive to political sentiment between the United States and the Far East.

It tends to be positively correlated to the USD/CHF and the U.S.

dollar/Canadian dollar (USD/CAD) currency pairs.

This relationship is due to the U.S.

dollar being the base 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"
british-pounds.jpg
Maurice van der Velden/E+
Trading in the GBP/USD currency pair represented 9.5% of forex market share, a small decrease from the prior survey in 2019.2 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 negative correlation with the USD/CHF and a positive correlation with the EUR/USD.

This is due to the positive correlation between the British pound sterling, the Swiss franc, and the euro.

4.

USD/CNY: Trading the Yuan
Image of Chinese yuan
The USD/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.2

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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Canadian money
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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.2 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.

The USD/CAD tends to be negatively correlated with the AUD/USD, GBP/USD, and EUR/USD pairs due t