It became known that the Bank of Japan may raise interest rates, which strengthens the national currency and reduces the dollar index. This dynamic is mainly associated with trading the dollar/yen currency pair on Forex.

What other currency pairs are popular on the market? Find out about this in the new ParadTrade material.

Why are currencies traded in pairs on Forex?

A currency pair is a relationship between two currencies, expressed as the amount of one currency needed to purchase the other. The value of a currency pair is determined by supply and demand in the market. Traders buy and sell currency pairs, speculating on the difference in their rates. Currencies are always traded in pairs because when you buy or sell one currency, you automatically buy or sell another.

Each currency pair has a base currency and a quote currency. They are on the left and right respectively.

The price of a currency pair is the amount of the quote currency required to purchase one unit of the base currency. For example, the price of the EUR/USD currency pair is 1.2000, which means that it takes 1.20 US dollars to buy one euro.

EUR/USD

The EUR/USD currency pair is known as the most popular and popular in Forex. This is due to the global influence of the economies of the European Union and the United States. Euro/US dollar also remains the most liquid currency pair. This provides tight spreads for traders, making it an attractive trading option.

EUR/USD has a negative correlation with the US dollar (USD) and the Swiss franc (CHF) and a positive correlation with the British pound (GBP). This is due to the fact that the euro, British pound and Swiss franc have a positive correlation with each other. For example, the euro and the British pound tend to move in the same direction.

USD/JPY

The US dollar/yen currency pair is the second most traded currency pair on the foreign exchange market. It is characterized by high liquidity and a market share of 13.5%. USD/JPY is sensitive to political sentiments between the United States and Far Eastern countries.

This pair has a positive correlation with the USD/CHF and USD/CAD currency pairs. This is because the US dollar is the base currency in all three pairs. USD/JPY also reacts to changes in Bank of Japan interest rates, which affects the exchange rate of the yen against the US dollar.

GBP/USD

The market share of the pound sterling/US dollar currency pair is 9.5%. Despite this, it remains one of the most actively traded pairs on Forex. The popularity of GBP/USD is due to the strength of the UK and US economies.

GBP/USD has a negative correlation with USD/CHF and a positive correlation with EUR/USD. This is due to the fact that the British pound, Swiss franc and euro have a positive correlation with each other.