MAJOR CURRENCY PAIRS EXPLAINED AND WHAT DRIVES THEM

What Are Major Currency Pairs?

In the world of foreign exchange (forex), currency pairs are the foundational element of all trading activity. A currency pair quotes two different currencies, showing how much of one you need to purchase one unit of the other. Among these, major currency pairs are considered the most liquid, widely traded, and economically significant.

There are seven commonly recognised major currency pairs in the forex market, each consisting of the US dollar and another top-tier global currency. They are:

• EUR/USD – Euro / US Dollar
• GBP/USD – British Pound / US Dollar
• USD/JPY – US Dollar / Japanese Yen
• USD/CHF – US Dollar / Swiss Franc
• AUD/USD – Australian Dollar / US Dollar
• USD/CAD – US Dollar / Canadian Dollar
• NZD/USD – New Zealand Dollar / US Dollar

The primary reason these pairs are classified as “major” lies in their high liquidity, narrow spreads, and the backing of robust, stable economies. As a result, they attract a large volume of daily trading, comprising over 80% of daily forex market turnover globally.

Each of these pairs is associated with specific economic regions that play pivotal roles in the global economy—the United States, Eurozone, United Kingdom, Japan, Canada, Australia, Switzerland, and New Zealand. These economies are characterised by mature financial systems, institutional integrity, and the availability of timely economic data, which supports trading transparency and investor confidence.

The inclusion of the US dollar in all major pairs underscores its role as the world's primary reserve currency. It remains central to global trade and finance, making any pair involving the USD naturally more liquid and influential.

Major pairs also benefit from significant news coverage and robust market analysis, aiding traders in making informed decisions. Furthermore, these pairs are often offered with the lowest transaction costs by forex brokers, especially for retail traders, enhancing their popularity further.

Though other pairs such as EUR/JPY or GBP/JPY are actively traded, they fall into the “cross pairs” or “minor pairs” category because they do not involve the US dollar directly. Meanwhile, currency pairs involving emerging market currencies, such as the USD/TRY or USD/ZAR, are known as “exotic pairs” and usually come with higher volatility and greater risk.

Understanding what constitutes a major pair—and why these specific combinations are the most significant—is essential for anyone considering entering the forex space, whether they are institutional investors or retail speculators. These seven pairs often act as barometers of economic health and sentiment on a global scale.

Grasping the basics of how these pairs are structured and why they matter lays the groundwork for deeper forex analysis, especially when we consider what typically drives their valuations—something we’ll explore further in the next sections.

What Drives Major Currency Pairs?

Major currency pairs reflect the relative strength of two global economies. Therefore, economic indicators, interest rates, political stability, and overall sentiment about the global economy are significant drivers of their movement. Understanding these drivers is central to predicting potential forex price shifts and identifying trading opportunities.

1. Interest Rate Differentials

The most important factor influencing currency values is interest rate differentials between nations. Each central bank (e.g., the Federal Reserve, European Central Bank, Bank of England, etc.) sets a benchmark interest rate that impacts the economy and its currency.

When a country raises its rates, its currency typically strengthens due to increased yield for investors. For instance, if the US Federal Reserve raises rates while the ECB holds steady, demand for the US dollar tends to increase, leading to a rise in the USD relative to the EUR. This directly affects pairs such as EUR/USD.

2. Economic Data Releases

Regularly scheduled economic indicators serve as vital signals for marketers and analysts. Some of the most impactful indicators include:

• GDP Growth Rates – Indicate the strength of an economy
• Unemployment Rates – High employment supports stronger currency forecasts
• Consumer Price Index (CPI) and inflation
• Retail sales and industrial production

Traders closely monitor these indicators for surprises or deviations from forecasts, which can cause significant movements in major currency pairs.

3. Central Bank Actions

Beyond merely adjusting interest rates, central banks engage in quantitative easing (QE), asset purchases, or other monetary policy tools that can influence monetary supply and demand dynamics. Unexpected policy shifts or comments from central bank officials often cause short-term volatility in their respective currencies.

For example, if the Reserve Bank of Australia unexpectedly signals a dovish outlook, AUD/USD could drop even if no rate changes occur at the moment.

4. Geopolitical Events

Markets are finely attuned to geopolitical developments. Events like Brexit had a profound impact on the GBP/USD pair, while tensions in East Asia may spur movements in USD/JPY. Similarly, sanctions or wars can impact commodity-linked currencies, such as USD/CAD given Canada's oil exports.

5. Risk Sentiment and Safe-Haven Flows

During times of uncertainty, investors often seek refuge in so-called "safe haven" currencies such as the US dollar, Swiss franc, or Japanese yen. Consequently, market-wide risk appetite or aversion directly influences forex markets.

Events like the COVID-19 pandemic or the Global Financial Crisis of 2008 dramatically increased demand for liquid, stable currencies, strengthening the USD, CHF, and JPY.

6. Commodity Prices

Some currencies, like the Australian dollar and Canadian dollar, are closely tied to specific commodities. Therefore, shifts in commodity prices such as oil, gold, and iron ore have knock-on effects on these currencies.

• USD/CAD often moves with oil prices.
• AUD/USD reacts to iron ore and gold.

Understanding these correlations gives traders an edge in spotting macroeconomic trends before they fully materialise in currency movements.

7. Trade and Budget Balances

A country with a high trade surplus is often viewed as having a stronger economy, which supports its currency. Conversely, persistent deficits can exert downward pressure, particularly on expectations of long-term sustainability.

This is especially important for EUR/USD, where Eurozone trade performance shows tangible correlation with currency appreciation or weakness.

In sum, multiple overlapping factors continuously influence the values of major currencies. Traders must synthesise these variables in real-time, assessing not just the data itself, but market expectations and positioning, as well as broader geopolitical narratives.

How Traders Approach Major Pairs

For traders, major currency pairs represent the most accessible segment of the forex market, offering high liquidity, consistent volatility, and a wealth of analytical resources. However, success in trading these pairs requires more than just familiarity—it necessitates a thoughtful strategy built on market knowledge, discipline, and responsive decision-making.

1. Technical vs. Fundamental Analysis

Many traders incorporate a blend of technical and fundamental analysis when approaching major pairs. Fundamental analysis interprets economic data and political developments, as previously outlined. Technical analysis, by contrast, focuses on price charts, patterns, and indicators such as:

• Moving Averages
• Relative Strength Index (RSI)
• MACD (Moving Average Convergence Divergence)
• Fibonacci retracements and support/resistance levels

Major pairs are particularly well-suited to technical analysis due to their high trading volumes and repetitive price behaviours, which create identifiable trends and key chart patterns.

2. Trading the News

Economic data releases foster significant short-term moves in major pairs. Experienced traders often monitor scheduled news events using economic calendars and deploy strategies including:

• Straddle trades to benefit from increased volatility
• Fade the news techniques where overreactions are reversed

Forecast deviation (actual result minus the analyst estimate) is a primary component of the price reaction. For instance, stronger-than-expected US job growth could lead to a spike in USD against other currencies.

3. Spreads and Costs

Major pairs typically offer the tightest bid-ask spreads, which enhances their appeal to day traders and scalpers. Spreads on EUR/USD, the world's most traded pair, can be as narrow as 0.2 pips with certain brokers. These reduced trading costs accumulate to substantial savings over time, making majors a preferred choice for active traders.

4. Position Sizing and Risk Management

Sound risk management is crucial. Traders often risk a fixed percentage of capital on each trade, with stop-loss and take-profit levels aligned with technical indicators and market context. Since major pairs are liquid, stop orders generally face low slippage, supporting disciplined trading.

5. Market Hours and Volatility

Forex operates 24 hours, but volatility in major pairs peaks during:

• London session (08:00–16:00 GMT)
• New York session (13:00–21:00 GMT)

The overlap of these sessions—between 13:00 and 16:00 GMT—offers the highest liquidity and tighter spreads, which seasoned traders exploit for intraday trading strategies.

6. Long-Term Trading Approaches

Institutional investors and sophisticated retail traders may also conduct macro fundamental positioning using major pairs. Such strategies involve forecasting long-term currency trends based on interest rate projections, economic cycles, and geopolitical outlooks.

For example, long USD positions may be taken in anticipation of multiple rate hikes, while short GBP positions might be formed amid political instability or underperforming economic indicators.

7. Tools and Platforms

Reliable trading platforms such as MetaTrader 4, MetaTrader 5, TradingView, and broker-provided proprietary tools allow traders to execute trades with precision and customise charting functionalities. Analytics embedded within these platforms help monitor performance and adapt to evolving market dynamics.

In conclusion, while major pairs are considered beginner-friendly due to their liquidity and stability, mastering their movement still demands ongoing education, anticipatory skills, and a firm grasp of how the macroeconomic landscape translates into price action.