What are Major Pairs?
These four major pairs are deliverable currencies and are part of the g10 currency group. While these currencies do a significant amount of volume related to economic transactions, these are also some of the most heavily traded pairs for speculative reasons, by traders, as well.
- The four major currency pairs are the EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
- The major currencies are some of the most heavily traded pairs in the world, along with the commodity currency pairs: USD/CAD, AUD/USD, and NZD/USD.
- The EUR/USD is by far the most heavily traded currency pair in the world and is popular among speculators due to its large daily volume.
Understanding the Major Pairs
The major pairs are considered by many to drive the global forex market and are the most heavily traded. Although it is widely regarded that the major pairs consist of only four pairs, some believe that the USD/CAD, AUD/USD, and NZD/USD pairs should also be regarded as majors. However, these three pairs can be found in the group known as the "commodity pairs."
The five currencies that make up the major pairs—U.S. dollar, euro, Japanese yen, British pound, and Swiss franc—are all in the top seven of the most traded currencies.
The EUR/USD is the world's most heavily traded currency pair, representing more than 20% of all forex transactions.
The USD/JPY is a distant second place, followed by the GBP/USD, and the USD/CHF with a small share of the global forex market.
Due to their commodity-based economies, trading volumes in the USD/CAD, AUD/USD, and NZD/USD will often exceed those in the USD/CHF and sometimes the GBP/USD.
Why Traders Trade the Major Pairs
Volume tends to attract more volume. This is because with more volume spreads between the bid and ask price tend to narrow, which means that the majors tend to have smaller spreads than exotic pairs. The major pairs have lots of volume. They, therefore, tend to attract the most traders to them, which keeps the volume high.
High volume also means that traders can enter and exit the market with ease, with large position sizes. In lower volume pairs it may be more difficult to sell or buy a large position without causing the price to move significantly.
High volume also means more people willing to buy or sell at a given time. That means there is a less chance of slippage, or smaller slippage when it does occur. That is not to say large slippage can't occur in major pairs, it can, but it is less common than in thinly traded exotic pairs.
How are Prices of the Major Pairs Determined?
The currencies of the major pairs are all free-floating currencies. That means the prices of the major pairs is determined by supply and demand for the respective currencies. Central banks may step in to control the price, but typically only when it is necessary to prevent the price from rising or falling so much that it could cause economic harm.
Supply and demand is affected by economic or fundamental conditions in each country, interest rates, future expectations for the country/currency, and current positions (positions need to be exited at some point).
Example of a Major Pair Price Quote and Fluctuation
Currency prices are constantly changing—especially the majors since there are so many participants putting through orders every second—with the current rate shown via a currency quote.
The price for the EUR/USD may be 1.15, which means it costs $1.15 to buy €1. If the rate moves up to 1.20, that means the euro has increased in value because it now costs more dollars, $1.20, to buy €1. If the rate drops to 1.10, it costs less USD to buy a euro, so the US dollar has increased in value or the euro has fallen in value.
The chart above shows a snapshot of the EUR/USD rate. On the left, the price of the EUR/USD is rising which means the euro is appreciating versus the US dollar. On the right, the price is falling as the euro declines in value relative to the US dollar.