Top Currency Pairs: A Guide to the Most Tradable Currency Pairs in The World

Understanding what the most tradeable currency pairs are is important in all levels of trading. Listen to find out why EUR/USD, USD/JPY and GBP/USD currency pairs are widely followed and traded...

Transcript

Top Currency Pairs: A Guide to the Most Tradable Currency Pairs in The World

 Recognising which currencies dominate the global foreign exchange market (Forex market) is important, a decentralised domain boasting a mind-blowing US$6.6 trillion daily volume. Followed by FX swaps at 47 percent, the volume of daily spot trades (US$2.0 trillion) accounts for 30 percent of global turnover.

 In addition to understanding heavyweight currencies—major currency pairs or major pairs—acknowledging the structure of a currency pair (sometimes referred to as a Forex pair) is also important, particularly for beginner traders. 

 Established by pairing two currencies against one another, exchange rates inform traders how much of one currency is worth in another. This may involve a home currency and foreign currency.

 A base currency represents the first currency in a quotation and denotes one unit. The second currency, positioned to the right in the quotation, is a quote currency, displaying how much of the quote currency is needed to purchase one unit of base currency. In the case of EUR/USD, the euro is the base currency and the US dollar represents the quote. 

 EUR/USD Currency Pair

 According to latest figures from the Bank for International Settlements (BIS), the US dollar remains the primary currency in today’s market, on one side of 88 percent of all trades. Followed by Europe’s shared currency, reporting a turnover of more than 30 percent, the EUR/USD is at the top of the ladder in terms of tradeable currency pairs.  

Worldwide acceptance of the EUR/USD stems from its composition: two of the world’s largest economies, the United States ($US 20.937 trillion [GDP]) and the European single market, or European Union ($US15.193 trillion [GDP])[2].

Making up 24 percent of daily volume, trading EUR/USD ensures a liquid environment and narrow spreads, both of which benefit traders.  

As shown in figure 1.A, EUR/USD has been underwater since the beginning of 2021 after peaking at $1.2350. Volatility, measured by the 14-day Average True Range (ATR), for the currency pair is somewhat subdued at current prices, offering an ATR of approximately 50 pips. A high (low) ATR value indicates volatility has increased (decreased) over the pre-determined period. 

 USD/JPY Currency Pair

The US dollar against the Japanese yen, or USD/JPY, is the second most widely traded currency pair, with a market turnover of a little more than 13 percent. What the exchange rate reveals is how much one US dollar is worth in Japanese yen, or how much yen are needed to acquire one US dollar. 

High liquidity and tight spreads are also a common theme with the USD/JPY. This stems from the yen (typically referred to as a safe-haven currency) being the third most traded currency globally, at 17 percent, as well as the US dollar governing a large portion of market turnover (see above).

From figure 1.B, readers will note the pair has exhibited a strong upside bias since the beginning of 2021, up more than 10 percent YTD. Although not visible on the chart, the recent ascent has price shaking hands with levels not seen since October 2018. 

The USD/JPY, according to the 14-day ATR, shows volatility is a touch higher than EUR/USD, registering 62 pips. As such, one can expect more price movement in USD/JPY over EUR/USD, on average. 

GBP/USD Currency Pair

The British pound (pound sterling) against the US dollar make up the GBP/USD. Controlling a market turnover of nearly 10 percent, this is the third most widely traded currency pair, essentially displaying how much US dollar is needed to purchase one unit of GBP, the base currency. 

Similar to EUR/USD and USD/JPY, the GBP/USD delivers a liquid setting and narrow spreads to work with, largely on account of the respective economies.  

Figure 1.C shows sterling has erased a large part of 2021 upside, topping at $1.4241. Overall, however, this is a market that’s been trending higher, following pandemic lows at $1.1410. Therefore, the 2021 retracement may be viewed as a dip-buying opportunity. Interestingly, GBP/USD volatility is highest of the three currency pairs, recording an 84-pip range, according to the 14-day ATR indicator.  

Forex Trading

Although EUR/USD dominance is clear and represents a popular FX trading vehicle among retail investor accounts, exploring other widely recognised currency pairs is an option. Not only can traders research USD/JPY and GBP/USD pairs, AUD/USD (the Australian dollar against the US dollar), USD/CAD (the US dollar against the Canadian dollar), USD/CHF (the US dollar against the Swiss franc [another safe-haven currency]) and NZD/USD (the New Zealand dollar against the US dollar) are popular currency pairs. 

Moving into cross currency pairs and exotic pairs is also a possibility for Forex traders. Popular ‘crosses’ are EUR/GBP, EUR/JPY and EUR/CHF. Unlike major currency pairs, crosses do not contain the US dollar.

Before choosing a currency pair to trade, a number of factors must be considered. This includes determining the analytical approach—the trading strategy—generally either fashioned through technical analysis or fundamental analysis, or both. Another important element to consider is the currency pair’s volatility (price fluctuations). As underlined in this article, EUR/USD displays relatively low volatility compared with GBP/USD. Volatility, of course, can be both a benefit and a burden. 

Consider checking out our Traders Hub (https://www.fpmarkets.com/blog/), a place offering unique daily market analysis on the currency market, based on technical and fundamental analysis, in addition to a comprehensive educational section covering several subjects.  

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[1] https://www.bis.org/statistics/rpfx19_fx.pdf
[2] https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=EU-US&name_desc=false