Forward Diary

Forex - The major pairs

It’s important to remember that backing one currency involves taking a position against the paired currency. For example, if you reckon the pound is set to rise against the dollar, you are also implying that the dollar will fall against sterling. Therefore, every currency trade involves someone going long in one currency and someone going short in the other. The most popular – and therefore the most liquid – currency pairs to trade are the euro (EUR) against the USD and Japanese yen and GBP against the USD. The Swiss franc (CHF) and the Australian (AUD), New Zealand (NZD) and Canadian dollars (CAD), again against the USD, form the second commonest pairs. More than 85% of all daily forex transactions will involve these major currencies. The most frequently traded currencies are usually those that belong to those countries with stable governments, low inflation and respected central banks. Forex market prices are driven by economic and political conditions, including interest rates, inflation and political stability. Governments may intervene in the forex market to attempt to raise or lower the price of their currencies. The biggest swings happen when an unexpected event occurs, but more often it is the expectation of an event and its outcome that drives the market rather than its actual arrival. Each pairing has its own personality, tends to respond to certain situations in particular ways and has a raft of existing relationships that you need to take on board. For investors new to FX, it usually makes sense to start with a pairing that has been around the block, is simple to research and moves in relatively clear trends. The most liquid of the major currency pairs, EUR/USD, is a good example. However, experts also suggest focusing on more than one pair – say, three or four – to avoid the temptation of forcing trades when there is little to justify them.   This ‘How to’ guide is produced by Shares Magazine and is only for general information and use, and is not intended to address particular requirements. The value of investments and the income derived from them can go down as well as up. Past performance is not necessarily a guide to future performance. You should get professional financial advice before making any investment decisions