When currencies traded on the forex market have a quote and pricing structure, also known as the currency valuation, which is decided by comparing it to another firm, it is referred to as a currency pair. The currency mentioned first is the base currency, while the money listed second is the quote currency in currency trading.
Forex trading entails the simultaneous purchase of one currency and the sale of another. As a result, we will always see currencies quoted in pairs when trading.
The currency pair itself shows how much of the quote currency is required to purchase one unit of the base currency. Each forex deal involves the simultaneous purchase of one currency and the sale of another, but the pair should be viewed as a single unit, a single item sold or purchased.
Types of Currency Pairs
Major currency pairs, exotic currency couples, and minor or cross-currency pairs are the three main categories of currency pairs.
The US Dollar is by far the most widely traded currency globally, as you’ve discovered. As a result, most currencies are quoted in terms of the US Dollar. However, when it comes to forex trading, there are various types of currency pairs, each divided into groups based on the amount of trading activity and liquidity. Majors, minors (or crosses), and exotic pairs are the three types of pairs.
Major Currency Pairs
The US Dollar appears on one side of all major currency pairs, either base or quote. In the FOREX market, they are the most commonly traded pairings. This is because the majors have the smallest spreads and the highest liquidity. The EUR/USD is the most traded pair with a daily trade volume of approximately 30% of the whole FX market, and the EUR/USD is the most traded pair.
Exotic Currency Pairs
Exotic currency pairs consist of a major currency paired with the currency of a rising or powerful but smaller economy from a global viewpoint, such as Singapore and European countries outside of the Euro Zone.
The cost of trading these currency pairs is much higher because these pairs are not frequently traded as majors and minors. T is due to the absence of liquidity in these markets.
Cross-Currency Pairs or Minor Currency Pairs
Cross-currency pairs, or crosses, are currency pairs that do not include the US dollar. Historically, if we wanted to change a currency, we had to convert it first into US dollars, then into the desired currency.
We no longer have to undertake this tiresome computation thanks to the introduction of currency crosses, as all brokers now give rapid exchange rates. The three most popular non-US dollar currencies are the source of the most active crosse. Minors are another name for these currency pairs.
Factors affecting currency pairs
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Inflation Rate
Changes in market inflation have a significant impact on the foreign exchange rate. If a targeted inflation rate is lower than that of another, its currency will increase in value. Conversely, when inflation is low, the increase in the price of goods and services is slower.
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Rate of Interest
Changes in interest rates affect the value of the currency and the currency market. So it is because interest rates, currency exchange rates, and inflation are all intertwined. Increasing interest rates deliver higher rates to lending institutions, attracting more foreign investment and causing transaction rates to rise, causing a country’s currency.
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Current Balance of Payments
A country’s current account reflects its trade balance and foreign investment revenue. In addition, it contains the total number of transactions.
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Government Debt
Government debt, often referred to as public debt or national debt, is owned by the federal government. As a result, it reduces a country’s ability to attract foreign capital, which leads to inflation.
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Terms of Trade
The balance of export prices to import prices, associated with direct debits and payments, is the trade balance. The terms of trade improve when a country’s export prices rise quicker than its import prices.
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Political Stability & Performance
Its political condition and economic performance can influence a country’s currency strength. As a result, a country with a lesser danger of political turmoil attracts foreign money away from countries with higher levels of economic growth.
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Recession
Interest rates are expected to fall amid a recession, limiting a country’s capacity to raise foreign capital.
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Speculation
Investors will demand more of a country’s currency in the future if the currency’s value continues to rise.
Bottom Line
All of these factors determine the Forex currency pair movement. Therefore, if you send or receive money frequently, staying up to current on these characteristics will help you choose the best time to send or receive money internationally. In addition, opt for a locked-in exchange rate service to avoid any potential declines in the currency exchange rate. It will ensure that your currency is exchanged at the same rate regardless of any variables that affect an unfavorable fluctuation.
FAQs
What are Currency Pairs?
Currency pairs refer to the exchange rates’ price quote for two different currencies. The currency pair is classified into two types: Base Currency and Quote Currency.
What are the 7 major currency pairs?
The most common and most traded currency pairs include EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD, and NZD/USD.
What is the easiest forex pair to trade?
The easiest and most stable forex pair is EUR/USD. It is the best choice for both professional and beginner traders. Due to tight spreads and high liquidity, this is the most traded currency pair.
What is the safest currency in the world?
Many investors and traders consider the Swiss Franc (CHF) as the safest currency in the world. Traditional investors consider it to be a safe-haven asset.
How many forex pairs should you trade?
New traders should focus on one or two currencies only. Most traders trade with EUR/USD and USD/JPY pairs as there’s so much information about these pairs.
What are Exotic Currency Pairs?
Exotic currency pairs refer to a pair that includes one major currency with a currency from a developing economy. A common example of exotic currency pairs as USD/TRY.
