The foreign exchange market, commonly known as forex, is the largest and most liquid financial market in the world. Within this vast market, the majority of trading volume takes place in what are known as the major currency pairs. These major pairs represent about two-thirds of the daily trading volume and are considered the most important barometers of the overall forex market. In this article, we will delve into the major currency pairs and understand what drives them, as well as explore the quoting conventions and their implications for margin-based trading.
Understanding the Major Currency Pairs:
The major currency pairs consist of four pairs that are heavily traded and watched by traders around the world. These pairs are:
Euro/US Dollar (EUR/USD)
US Dollar/Japanese Yen (USD/JPY)
British Pound/US Dollar (GBP/USD)
Australian Dollar/US Dollar (AUD/USD)
Each of these currency pairs represents a unique economic and political relationship between the two countries involved. When you hear about the US dollar rising or falling, it usually refers to its performance against these major currencies. Understanding the fundamental drivers of each currency pair is crucial in predicting their movements and making informed trading decisions.
Analyzing the EUR/USD Pair:
The EUR/USD is the most actively traded currency pair in the global forex market. It represents the exchange rate between the US dollar and the euro, the currency of the Eurozone. The Eurozone is a group of countries within the European Union that adopted the euro as their unified currency in 1999.
Factors influencing the EUR/USD pair include global trade and asset allocation, central bank credibility (particularly the European Central Bank), and the euro's status as an alternative global reserve currency to the US dollar. Additionally, both Eurozone and US economic data and news significantly impact the pair's price action.
Trading Behavior of EUR/USD:
EUR/USD is known for trading tick by tick, meaning it tends to move in smaller price increments compared to other currency pairs. It also experiences fewer price jumps and smaller price gaps, especially during normal market conditions. Backing and filling is a common price action in this pair, where prices move rapidly in one direction and then consolidate before resuming the trend.
Due to its deep liquidity and tight trading spreads, EUR/USD attracts both short-term and long-term traders. The pair's popularity and stability make it a favorite among traders seeking consistency and ease of trading.
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