Forex Currency Pairs – An Explanation of Types and the Best Pairs

Forex currency pairs are considered the cornerstone and foundation upon which all investment transactions in the foreign exchange market are based.

Unlike traditional financial markets (such as corporate stocks), which involve buying a single asset, trading in the Forex market is based on the principle of a dual exchange, you buy one currency while simultaneously selling another.

If you’re planning to enter the world of trading, understanding how currency pairs work, their different types, and how to interpret them is the first and most essential step toward building a successful and profitable trading strategy.

What Is a Currency Pair in the Forex Market?

A currency pair is a pricing notation that combines two different currencies to determine their relative value.

The pair’s price reflects the amount of the second currency needed to buy one unit of the first currency.

All currency pairs are written in a standard format consisting of two adjacent symbols, such as: EUR/USD or GBP/USD.

Illustrative example:

In the euro-dollar pair (EUR/USD)

EUR (euro): is the base currency.

USD (U.S. dollar): This is the quote currency.

If the pair’s price is 1.1000, this means that 1 euro = 1.10 U.S. dollars.

When you buy (Buy): You expect the value of the euro to rise against the dollar.

When you sell (Sell): You expect the value of the euro to fall against the dollar.

How to Read and Interpret Currency Pair Movements

Currency codes worldwide consist of three letters agreed upon by the International Organization for Standardization (ISO), where the first two letters indicate the country’s name, and the third letter indicates the currency’s name (e.g., USD = US Dollar).

Price Movements and Relative Strength

When looking at a price such as GBP/USD = 1.2700:

- A rise in price to 1.2800: indicates an increase in the strength of the British pound (or a weakening of the dollar).

- A decline in the price to 1.2600: This indicates a decline in the value of the British pound (or strength of the dollar).

Golden Rule: A currency pair’s price movement does not mean that the two currencies are moving in the same direction independently; rather, it reflects the relative strength of one currency against the other.

Types of Currency Pairs in Forex

Currency pairs in the global market are classified into three main categories based on trading volume, liquidity, and risk:

1- Major Currency Pairs  (Major Pairs)

These are the most common and most-traded pairs in the world, characterized by the presence of the U.S. dollar (USD) as one of the base currencies.

Features: Very high liquidity, relative stability, and low spreads.

Notable examples:

EUR/USD Euro / U.S. Dollar (the most traded pair globally)

GBP/USD British Pound / U.S. Dollar (known as “the Cable”)

USD/JPY U.S. Dollar / Japanese Yen USD/CHF: U.S. Dollar / Swiss Franc

AUD/USD: Australian Dollar / U.S. Dollar

USD/CAD: U.S. Dollar / Canadian Dollar

2- Minor Currency Pairs or Cross Pairs

These are pairs consisting of strong major currencies that do not include the U.S. dollar.

Advantages: They allow trading on the movements of major economies independent of the influence of U.S. news and are characterized by faster volatility and diverse trading opportunities.

Notable examples:

EUR/GBP: Euro / British Pound

EUR/JPY: Euro / Japanese Yen

GBP/JPY: British Pound / Japanese Yen (known as the “Crazy Pair” due to its sharp movements)

AUD/JPY Australian Dollar / Japanese Yen

3- Exotic Pairs

These pairs consist of one major currency (such as the USD or EUR) against the currency of a country with an emerging or small economy.

Features: Sharp and volatile price movements, low liquidity, and very high spreads, making them higher risk compared to other types.

Notable examples:

USD/TRY U.S. Dollar / Turkish Lira

USD/ZAR U.S. Dollar / South African Rand

USD/MXN U.S. Dollar / Mexican Peso

Factors Influencing Currency Pair Movements

Currency prices are influenced by a range of economic and political factors, and understanding these factors is at the heart of fundamental analysis:

- Interest rates: Decisions made by central banks (such as the U.S. Federal Reserve or the European Central Bank) are considered the primary driver of currency prices.

- Inflation Rates: Rising inflation reduces a currency’s purchasing power, but it may prompt central banks to raise interest rates, which subsequently strengthens the currency’s value.

- Major economic data: Nonfarm Payrolls (NFP) reports, Gross Domestic Product (GDP), and retail sales figures.

- Geopolitical events: Political crises, wars, and presidential elections cause a restructuring of capital flows between countries.

What are the best currency pairs for beginners?

Trading experts always advise beginners to focus on the major pairs, primarily EUR/USD and GBP/USD.

Reasons why major pairs are preferred for beginners:

- Low cost: They feature very narrow spreads.

- High liquidity: Buy and sell orders are easily executed during normal trading hours without delay.

- Clarity of analysis: There is a vast amount of daily news and analysis available on these pairs compared to exotic currencies.