We know what Forex is and how we trade it. So let’s take a more in-depth look at this fascinating world of trillions of dollars.

What is a currency pair?

A forex currency pair is the most direct way you can trade currencies. As the name implies, it consists of two currencies, which together make a pair. When you choose a forex pair, you will see one currency listed before the other, e.g., EUR/USD. The first currency is known as the “base currency” and the second currency is known as the “quoted currency”. The price of a currency pair equates to how much of the quoted currency is needed to purchase one unit of the base currency.

Here, the currency on the left is the base currency (EUR) while the currency on the right is the quoted currency (USD). The quoted currency is also referred to as the variable currency.

The base currency is quoted first, and that currency is always the one in which the trade is conducted; i.e., a trader is either buying or selling the base currency. The variable currency is always the currency in which a profit or loss is expressed.

If the value of the above currency pair goes up or down, it means that the value of the US dollar is strengthening or weakening against the euro.

What are the major currency pairs?

One of the major differences between the forex market and equity market is the number of instruments that a trader can trade; the forex market has very few compared to the thousands of company stocks that are found in the equity markets.

There are around 180 different currency pairs that forex traders can generally choose to trade; however, the majority of market participants focus their efforts on trading just 8 different currency pairs known as the “majors”.

As a newcomer to forex trading, it’s often recommended to trade “major” forex pairs when starting. The main reason is that these pairs offer the most market liquidity. Liquidity is important. It means that many investors are trading the pair. This is good for you, as it will make it easier to buy and sell. It also means that in most cases, you’ll encounter smaller gaps between the prices you can buy and sell for.

More “minor” forex currency pairs may have bigger gaps between the two prices, which immediately brings with it increased market volatility. The volatility occurs due to the reduction in the number of active buyers and sellers in the market. Minor forex pairs have wider “spreads” in the buy and sell prices, as sellers aren’t prepared to lower the selling price, and buyers are equally reluctant to bid more.

It’s also worth noting that the bigger the gap between the buy and sell price, the more the price must move for your forex trade to be profitable.

The major currency pairs (or majors) include:

EUR/USD (Euro/US dollar)

The EUR/USD, also known as “Euro-Dollar”, consists of the currencies of the European Union and the United States of America. The euro acts as the base currency, and the US dollar acts as the quoted currency. Always remember that the quoted currency states how much is required to buy one unit of the base currency.

One of the key differentiators between the value of the euro and the US dollar is their respective interest rates. The rates set by the European Central Bank (ECB) and the Federal Reserve can play an influential role. Meanwhile, any issues affecting EU nations can destabilise and weaken the EUR/USD. For example, the euro dropped in value against the US dollar at the outbreak of the war in Ukraine.

USD/JPY (US dollar/Japanese yen)

The USD/JPY, also known as “Dollar-Yen”, is another major currency pair in the forex market. It measures how many Japanese yen are required to purchase one US dollar.

Fun fact: one of the main reasons why this forex pair is so popular is that it contains the most traded currency as its base currency and the primary reserve currency in liquidity terms as its quote currency.

Think of the Dollar-Yen as the forex link between the Western and Eastern worlds. Both the US and Japanese economies are considered some of the most risk-averse in the world, which means the Dollar-Yen can lag behind some of the other major currency pairs in terms of price volatility. However, this is precisely why it can be a suitable starting point for entry-level forex investors.

GBP/USD (Pound/US dollar)

The GBP/USD currency pair (historically called the “Cable”) brings together the British pound sterling and the US dollar. Before World War I, the pound was the most valuable currency in the world. More than three-fifths of the world’s debt was stored in sterling. However, the US dollar rapidly took over post-World War II, and the emergence of the Bretton-Woods monetary framework—which fixed the value of the greenback to the price of gold—saw the USD surge. Although the US dropped the so-called gold standard in 1971, it remains the most influential currency in the present day.

One of the key factors in the GBP/USD in recent years has been the UK’s Brexit vote to leave the European Union. With huge uncertainty surrounding the trading relationship between the UK and EU following the referendum, the price of the GBP/USD plunged by 8% in a single day—the highest 24-hour move since the end of the Bretton-Woods framework in 1971.

USD/CHF (US dollar/Swiss franc)

The USD/CHF is commonly called the “Swissie” because it pairs the US dollar with the Swiss franc. Like the US dollar, the Swiss franc is a currency with plenty of history and tradition dating back to the 18th century.

For many years, the Swiss franc has been considered a relatively safe-haven currency to invest in compared with other more volatile options because of Switzerland’s financial and political stability. It is also thought to be attractive because at least 40% of its currency is backed by gold reserves. Furthermore, it’s a currency that benefits from near-zero inflation.

One of the huge benefits of investing in the “Swissie” is its market movements, which typically mimic major geopolitical news. In times of difficulty, such as the Great Recession of 2008, investors would have dived into the franc to protect their funds from the volatility in the US economy.

Switzerland is also heavily intertwined with the European Union, both culturally and economically. Therefore, any negative news surrounding the outlook for the bloc can have a negative effect on the “Swissie”. For example, in 2015, investors were stunned when the Swiss National Bank suddenly dropped the peg they had set with the euro in 2011. Within minutes of the announcement, the Swiss franc soared up to 30% against the euro and 25% against the USD, causing mayhem in currency markets and massive trader losses.

AUD/USD (Australian dollar/US dollar)

AUD/USD is one of the globe’s most popular traded currency pairs. Trading AUD/USD is also known as trading the “Aussie”, and it can be greatly affected by the production of Australian commodities (such as coal, iron ore, and copper). Being closely tied to the price of commodities makes AUD/USD quite volatile and cyclical in nature because prices of global commodities usually go up when economic growth is strong. This makes AUD/USD what some call a “risk-on” currency pair. The dependence on commodities also links AUD/USD closely to the health of China’s economy, which is one of the key commodity consumers.

AUD/USD may also be influenced by the interest rate differential between the Reserve Bank of Australia and the Federal Reserve. Australia is often a carry trade choice along with the US, especially for Japanese borrowers. That makes AUD/JPY also a popular currency pair, and it is seen as a good indicator of risk sentiment in financial markets because AUD and JPY react in opposite ways to global risk sentiment.

AUD/JPY moves higher during periods of optimism because AUD gains on optimism of improved commodity demand, while JPY weakens as safe-haven bids retreat. Likewise, AUD/JPY declines when risk sentiment is weak. AUD/NZD is also a commonly tracked currency pair given the close linkages in Australia and New Zealand economies.

USD/CAD (US dollar/Canadian dollar)

USD/CAD is the abbreviation for the USD/Canadian dollar currency pair. The exchange rate between these two currencies is quoted as USD 1 (the base currency) per X Canadian dollars (the quoted currency). So, if you see USD/CAD quoted by a bank or exchange desk at 1.26 on your travels, you’d pay 1.26 Canadian dollars for 1 US dollar. While the two currencies have reached parity at some points, the US dollar has traditionally been the stronger of the two.

USD/CAD is driven by various factors affecting the value of the US dollar and Canadian dollar in relation to each other. Economic indicators like the monthly US jobs report or interest rate announcements by the Federal Reserve and Bank of Canada (BoC) can all move USD/CAD higher or lower.

Canada’s commodity exports—particularly oil—also play a major role in setting the value of the Canadian dollar. If the price of oil rises, the Canadian dollar should also rise—and vice versa. In 2016, for example, the Canadian dollar fell to a record low of 1.46 as oil prices tumbled below USD 30 per barrel, the lowest price in decades.

EUR/JPY (Euro/Japanese yen)

The “Euro-Yen” cross-currency pair is the seventh most traded forex pair in the market. Its popularity stems from the pair’s regular volatility, with the price action attracting day traders and investors alike.

The Meiji government established the Japanese yen in the late 19th century. The expansion of Japan as an industrial powerhouse has enabled the yen to grow into one of the most influential currencies worldwide.

The Japanese economy has suffered from sluggish growth for many years now, but the uncertainty surrounding the Eurozone and the ongoing Brexit saga also raises question marks over the euro. That’s why price action is so prevalent here, as market forces attempt to get a handle on supply and demand.

EUR/GBP (Euro/pound)

The EUR/GBP currency pair (also known as “Chunnel”) has caught the news headlines in recent years, given the EU referendum and subsequent Brexit vote. The euro and pound sterling are two of Europe’s most influential currencies, given that the EU and British economies are some of the strongest in the Western world. Here, the pound acts as the quoted currency, so EUR/GBP shows how many pounds are needed to buy one euro.

Interest rates and GDP data are two key drivers of the EUR/GBP pair, aside from Brexit. If the ECB cuts interest rates in the Eurozone, this usually weakens the EUR/GBP. If the Bank of England cuts interest rates, it mostly strengthens the EUR/GBP. This is because lower interest rates typically go hand-in-hand with reduced demand for a currency in the forex markets.

XAU/USD (Gold/US dollar)

XAU/USD (Gold-USD) is a symbol used in forex trading to indicate how many US dollars are needed to buy one ounce of gold. Gold is a precious metal and a physical commodity that has been in use since ancient times.

Up until the 1900s, the countries of the world used a gold standard as a monetary system, basing their currencies on a fixed amount of gold. And even though this system has long been abandoned, gold is still considered a great investment product and is very popular among traders. While many buy gold as a physical asset from banks or dealers, XAU/USD as a currency pair enables people to take a view on the value of gold without physically having to hold the commodity.

Gold is a rare metal in limited supply and highly resistant to wear and corrosion. That makes it ideal for long-term storage—not only attractive for making jewelry—but also as a store of value because it can preserve its purchasing power over extended periods, serving as a hedge against inflation and the instability of stocks and currencies. This means gold is considered a safe haven, and demand usually picks up when there are concerns of a recession or political/geopolitical turmoil. Gold is also often used by governments that have a large gold reserve to protect the value of their currency.