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In the world of foreign exchange trading, a currency pair is a way to show the value of one currency against another, such as British pounds and US dollars.
With around 170 currencies in use around the world, there are over 28,000 potential pairs, though only a handful account for the majority of trades.
They are traded on the foreign exchange (or ‘forex’) market, an enormous global market that sees $6.6 trillion worth of transactions every day, according to data from the Bank for International Settlement (BIS).
Each currency pair consists of a ‘base’ and a ‘quote’ currency. The base currency is what the trader is buying, while the quote currency is what they’ll be using to buy it.
The base currency is always written on the left of the pair, and is always equal to one unit, such as £1 or $1.
The quote currency is always written on the right. For instance, a trader purchasing the forex pair EUR/USD is exchanging dollars for Euros.
The pair is followed by a price quote – the amount of quote currency it would take to buy one unit of the base currency. If EUR/USD = 1.14282, for example, a trader could purchase €1 for $1.14282.
The value of one currency against another fluctuates regularly, driven by factors such as:
- economic performance – when one economy grows relative to another, its currency tends to rise in value. Conversely, inflation within an economy erodes its value
- central bank interest rates – differences between central bank rates (in the UK this is the Bank of England Bank Rate) can affect the relative value of the currencies they issue
- trading volumes – sentiment can affect a currency’s value. For instance, if a large number of traders begin selling off a certain currency others could be influenced and its value may drop.
Types of currency pair
Currency pairs can be broken down into three main categories: major, minor and exotic.
Major forex pairs
‘Major’ currency pairs exchange the US dollar – the world’s most traded currency – with other highly traded currencies.
These pairs tend to be less volatile than their minor and exotic counterparts, since they feature the world’s most widely traded currencies, issued in relatively stable economies.
They can typically be purchased with a low ‘bid-ask spread’ – the difference between the price at which a broker will sell a pair, and the price at which they’ll buy it.
For instance, if the currency pair EUR/USD could be bought on an exchange for $1.08806, and sold for $1.08822, the bid-ask spread would be $0.00016.
The ‘big four’ major pairs have the highest trading volumes. These are:
- EUR/USD According to BIS data, this currency pair accounted for over a fifth (22.7%) of all forex trades in April 2022.
The pair represents two of the largest economies in the world: the US, and the European Single Market.
Because both currencies are so widely used, the pair has high ‘liquidity’ – which refers to how quickly and easily an asset, in this case a currency, can be bought and sold.
Highly liquid pairs such as EUR/USD tend to have a low bid-ask spread, since it’s easy to find buyers and sellers.
- GBP/USD With this currency pair, traders exchange dollars for British Pounds. It’s sometimes nicknamed ‘cable’ for the deep-sea cables that used to transmit bid and ask quotes between New York and London.
According to BIS data, the GBP/USD pair made up 9.5% of daily forex transactions in April 2022.
- USD/JPY Traders buying this currency pair exchange Japanese Yen for US dollars.
The Yen is Asia’s most widely-traded currency, so it offers high levels of liquidity. Colloquially, traders sometimes call this pair ‘ninja’, in reference to the traditional Japanese stealth soldiers.
- USD/CHF This currency pair comprises the US dollar and Swiss franc.
Commonly known as ‘Swissie’, it’s a popular option for traders, since the Swiss financial system is considered a safe haven. During times of market instability, the Swiss franc tends to remain relatively stable.
Some traders may also consider the following currency pairs to be ‘major’:
- EUR/GBP This pair accounted for 2% of daily forex trades in April 2022, according to BIS data. It’s sometimes nicknamed ‘chunnel’, after the channel tunnel that connects the UK and France.
The relative value of pounds and Euros has become more difficult to predict in recent years, since the ties between the two currencies have loosened since the UK left the European Union and European Single Market.
Since Brexit, the pair has become more volatile, making it a riskier investment.
- USD/KRW This pair trades the US dollar against the South Korean Won – the fourth largest currency in Asia.
This pair rose in popularity following the rapid development of South Korea in the 1960s.
Minor forex pairs
‘Minor’ currency pairs exchange Euros, British pounds, or Japanese yen against each other, or a smaller currency.
These pairs are popular, but experience lower trading volumes than major pairs.
Popular minor pairs include:
- GBP/JPY – British pounds and Japanese Yen
- GBP/CHF – British pounds and Swiss francs
- GBP/AUD – British pounds and Australian dollars
- EUR/JPY – Euros and Japanese Yen
- AUD/CAD – Australian dollars and Canadian dollars
‘Exotic’ and other forex pairs
‘Exotic’ currency pairs combine an emerging market currency with a more widely traded currency.
Since emerging market currencies are less widely traded and are hence less liquid, these pairs usually come with a comparatively wide bid-ask spread.
For instance, purchasing the USD/HKD pair may have a bid-ask spread of around $0.0050, compared with the $0.00016 spread seen on the EUR/USD pair.
Prices are often volatile, since the value of an emerging market’s currency can swing quickly in response to political and economic events.
Because the ‘exotic’ currency in these pairs is not widely traded, the actions of each individual trader can also have a comparatively large impact on market sentiment.
Some of the most popular exotic pairs include:
- USD/HKD US dollar and Hong Kong dollar. Trading volumes for this pair doubled between 2016 and 2019, according to BIS data. The Hong Kong dollar has been pegged to the US dollar since 1983. This means the territory’s de-facto central bank (the Hong Kong Monetary Authority) has committed to maintaining a fixed exchange rate between the two currencies. However, their relative values are allowed to fluctuate within a pre-determined range.
- USD/TRY US dollar and the Turkish lira
- GBP/SGD British pound and the Singapore dollar
- EUR/MXN Euro and Mexican peso.
How to buy currency pairs
With the advent of investing apps and online brokers, it’s become easier for retail investors to enter the forex trading market, which has historically been the reserve of institutional investors such as large corporate pensions and insurance funds, and companies with multiple overseas locations.
Each forex broker is different, but traders can expect to go through the following steps:
Choose a platform or broker First, select a forex broker that meets your needs. It’s worth considering factors such as fee structure, user interface, minimum trading volumes and whether educational resources such as demo accounts are available.
Choose your trading method When it comes to trading forex, you have a few options:
- Spot trading: swapping currencies in real-time
- Forward trading: taking out a private contract between to buy a currency at a later date, with a predetermined price
- Futures: a standardised agreement to exchange currencies at a predetermined time and price.
Select your currency pair Next, select the currency pair you want to purchase. When deciding what to trade, you can account for factors such as your personal level of risk tolerance, trading strategy and the pair’s bid-ask spread.
Nick Cawley, senior strategist at DailyFX, says: “The more liquid a foreign exchange pair, EUR/USD for example, the easier and cheaper it is to trade and less likely that the price will change markedly on a large order.
“Retail investors looking to trade in the foreign exchange market should look at the major fx-pairs including EUR/USD, GBP/USD and USD/JPY.”
Typically, you can find currency pairs by opening the broker’s app or website, and using a search bar. You’ll be prompted to enter the amount you’d like to purchase, and how you want to trade.
Remember that forex trading carries risk, and you could lose some or all of your money.
Forex trading time frames
While much forex trading happens within the space of a single trading day, it’s possible to hold a currency pair for days, weeks, months, or even years.
‘Day traders’ buy and sell currencies over the course of a single day, closely monitoring market movements.
‘Swing traders’ hold currencies over a number of days or weeks, in a bid to predict short-term trends.
‘Buy-and-hold’ traders prefer to make long term predictions about the relative strength of currencies, and may hold currency pairs over a number of years.
Example trade
Here’s how buying and selling a currency pair might work in practice.
- A trader expects Euros to rise in value relative to the US dollar, and buys the currency pair EUR/USD, trading at 1.0924
- They exchange $10,000 for €9,154.1560
- The price increases from EUR/USD = 1.9024 to EUR/USD = 1.9039
- This movement represents 15 ‘pips’ – the unit of price movement used by forex traders. Each pip is a one-digit move in the fourth decimal place of a currency pair, for instance €0.0001 – or a hundredth of a cent
- If the trader converts their Euros back to US dollars, they will have earned $0.0015 on each dollar they exchanged
- With a $10,000 trade, their profit would total $15 ($10,000 x £0.0015), minus any trading fees
- If the value of the Euro had fallen 15 pips relative to the dollar, the trader would have lost $15.
How much does forex trading cost?
Due to high trading volumes and market activity, fees and commissions on forex trading are typically low.
Exactly what you’ll pay depends on the broker you choose, and the pair you want to buy. You’ll typically be charged one of more of the following fees:
- Spread The ‘spread’ on a currency pair refers to the difference between the price at which a broker sells a pair, and the price at which they will buy it.
- Commission A commission is a small one-off fee some brokers charge for each transaction you make.
- Swap fee This is the interest you might pay for holding a forex pair overnight.
- Inactivity fee Some brokers charge a monthly inactivity fee when you haven’t executed a trade for a certain amount of time – such as 12 months.
