The foreign exchange market is the largest and most liquid financial market in the world, with an estimated daily trading volume of $7.5 trillion according to the Bank for International Settlements (BIS). This figure is more than the annual GDP of most countries and dwarfs other financial markets. In this enormous market, currency pairs are the basic building blocks of all forex trading.
It is important to understand the major forex pairs and, more importantly, what makes them popular and attracts the most trading volume. Popular pairs have a few advantages for both rookie and professional traders: their huge liquidity allows you to enter and exit positions with ease; their small spreads lower your trading costs; and their greater transparency means more effective price discovery and technical analysis.
When you go overseas and exchange dollars at the airport for euros, you are participating in essentially the same process driving the EUR/USD currency pair, the most popular currency pair in the world. The only difference is that forex traders buy and sell those currencies hoping to profit from price movements, and they are not just exchanging money so they can spend it while being on holiday.
What Are Forex Currency Pairs
Before we jump into the most popular pairs, we need to understand what currency pairs are and how they work. A currency pair is the quote of one currency against another. Every pair has a base currency (the first currency in the pair) and a quote currency (the second currency in the pair).
For example, if you're looking at the EUR/USD and it's trading at 1.10, that means you can exchange 1 euro for 1.10 US dollars. The EUR is the base currency and the USD is the quote currency. When you see this rate, you are basically looking at an amount of quote currency (USD) needed to purchase one base currency unit (EUR).
EUR/USD The King of Currency Pairs
The EUR/USD pair (nicknamed "Fiber") represents approximately 24 percent of all forex trading volume making it the king of currency pairs. The EUR/USD features exceptional liquidity, with spreads sometimes as low as 0.1 pips during each major session as well. The popularity of this pair originates from the fact that it consists of and represents the two largest economic blocs in the world, the European Union and the United States.
Key characteristics include moderate volatility (typically 70100 pips average daily range), so it suits both conservative and aggressive trading styles. The pair responds predictably to major economic data releases, Federal Reserve announcements, European Central Bank policy decisions, and geopolitical events affecting either region. An example was in 2022 when the pair broke parity (1.00) for the first time in 20 years when the Federal Reserve began an aggressive tightening cycle and attention on the energy crisis in Europe increased.
Macro Drivers and Central Banks
Central banks are the primary drivers of currency values through their monetary policy decisions, so understanding how they operate and what drives their decisions is fundamental to anyone serious about forex trading.
For all intents and purposes, the Federal Reserve (Fed) is the epicenter of the forex universe given that the US dollar is in approximately 88% of all currency transactions. If the Fed hikes rates, the ripple effect will be felt throughout the entire global financial system.
The 20222023 period is an excellent case study: by aggressively hiking rates from near zero to over 5%, the Fed created massive strength across all major pairs for the US dollar.
Geopolitics & Safe Haven Currencies
Geopolitical events and global uncertainty produce some of the biggest movements in forex markets, especially benefiting what traders call "safe haven" currencies. Safe havens rise in value as investors seek safety during uncertain times, creating patterns that are predictable and tradeable for experienced traders.
The US dollar is still the world's primary safe haven currency for many reasons: the size and liquidity of US Treasury markets, the dollar's role as the global reserve currency, and the stability of US institutions. At the onset of the 2020 pandemic, the dollar index increased over 8% in only a few weeks as global investors scrambled to find dollardenominated assets.
Conclusion
The forex trading market centers around a limited number of currency pairs that have become popular due to their steady liquidity, relatively small volatility, and clear underlying fundamentals. EUR/USD remains the dominant currency pair and the best mixture of tight spreads, moderate volatility, and quality analysis. USD/JPY provides access to Japanese markets, safehaven dynamics, and good liquidity when trading currencies in Asia. GBP/USD offers traders more volatility for higher rewards but inuring resulting potential downside.
When you see why these pairs generate the most global trading volumes, superior liquidity, lower transaction costs, and consistent and reliable technical analysis makes sense to help develop an informed trading strategy. Central bank policy affects economic events which affects trader psychology creating a lot of predictable patterns that skilled traders can exploit across different markets.
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