Market Analysis

 

Investing in currencies other than the British pound exposes your investments to currency exchange risks. The fluctuating nature of currency exchange rates can impact the value of your investment when expressed in sterling terms. 

It's important to note that even if the stock price increases in the currency of origin, you may experience financial losses in sterling terms. Additionally, stocks listed on foreign exchanges may incur extra dealing and exchange rate charges, along with potential tax implications, and may not offer the same regulatory protection as in the UK.

In the realm of foreign exchange trading, a currency pair serves as a representation of the value of one currency relative to another, such as the British pound against the US dollar. With approximately 170 currencies in circulation globally, there are over 28,000 possible pairs, though only a few dominate the majority of trades.

These currency pairs are actively traded on the vast foreign exchange (forex) market, witnessing a colossal $6.6 trillion in daily transactions, as reported by the Bank for International Settlement (BIS).

Each currency pair comprises a 'base' and a 'quote' currency. The base currency is what a trader is purchasing, while the quote currency is the currency they'll use for the transaction. The base currency is consistently positioned on the left side of the pair and is always equivalent to one unit, such as £1 or $1.

Conversely, the quote currency is consistently positioned on the right. For example, if a trader is buying the forex pair EUR/USD, they are exchanging dollars for euros.

Following the currency pair is a price quote, indicating the amount of quote currency required to purchase one unit of the base currency. For instance, if EUR/USD = 1.14282, a trader could acquire €1 for $1.14282.

One currency's value relative to another changes frequently due to a variety of variables, including:

economic performance: The value of a country's currency tends to increase as its economy grows in comparison to another. On the other hand, inflation reduces the value of an economy.

Interest rates set by central banks: The relative worth of the currencies they issue can be impacted by variations in central bank rates, which in the UK are set by the Bank of England Bank Rate.

 

trade volumes: The value of a currency can be influenced by sentiment. For example, if several traders start liquidating a particular currency, other traders may be swayed and its value may decline.

Types of Currency Pairs:

Currency pairs are commonly categorized into three groups: major, minor, and exotic.

Major Forex Pairs:

Major pairs involve the exchange of the US dollar, the most widely traded currency globally, with other highly traded currencies. These pairs, such as EUR/USD, GBP/USD, USD/JPY, and USD/CHF, are known for their lower volatility compared to minor and exotic pairs. Major pairs, especially the 'big four,' typically feature currencies from stable economies and have a narrow bid-ask spread, making them easily tradable.

EUR/USD:

This pair accounts for a significant portion of all forex trades, representing the US and the European Single Market. The high liquidity of EUR/USD is attributed to the widespread use of both currencies.

GBP/USD:

Traders exchange dollars for British Pounds in this pair, which is sometimes referred to as 'cable.' GBP/USD is notable for comprising a substantial share of daily forex transactions.

USD/JPY:

Traders dealing with this pair exchange Japanese Yen for US dollars. Known colloquially as 'ninja,' it benefits from the high liquidity of the Yen.

USD/CHF:

Comprising the US dollar and Swiss franc, this pair, often called 'Swissie,' is popular among traders due to the stability associated with the Swiss financial system.

EUR/GBP:

This pair, nicknamed 'chunnel,' involves the exchange between the Euro and the British Pound. Post-Brexit, it has become more volatile, posing increased risks for investors.

USD/KRW:

Trading the US dollar against the South Korean Won, this pair involves the fourth-largest currency in Asia.

 

Minor Forex Pairs:

'Minor' currency pairs involve the exchange of Euros, British pounds, or Japanese yen against each other or a smaller currency. Although these pairs are popular, they typically experience lower trading volumes compared to major pairs.

Examples of 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 one. Due to the lower liquidity of emerging market currencies, these pairs often have a wider bid-ask spread. For instance, the bid-ask spread for the USD/HKD pair may be around $0.0050, compared to the $0.00016 spread observed on the EUR/USD pair.

Prices in exotic pairs tend to be volatile, as the value of an emerging market's currency can rapidly fluctuate in response to political and economic events. Since the 'exotic' currency is not as widely traded, individual traders' actions can have a relatively large impact on market sentiment.

How to buy currency pairs

With the rise of investment apps and online brokerage platforms, retail investors now have easier access to the forex trading market, traditionally dominated by institutional investors like large corporate pensions, insurance funds, and multinational corporations. The process of buying currency pairs through various forex brokers generally involves the following steps:

Choose a Platform or Broker:

Begin by selecting a forex broker that aligns with your requirements. Consider factors such as fee structures, user interface, minimum trading volumes, and the availability of educational resources, including demo accounts.

Choose Your Trading Method:

In forex trading, you have several options:

Spot Trading: Real-time swapping of currencies.

Forward Trading: Entering a private contract to buy a currency at a later date with a predetermined price.
Futures: Engaging in a standardized agreement to exchange currencies at a predetermined time and price.

Select Your Currency Pair:

Choose the currency pair you wish to purchase. Factors to consider include your risk tolerance, trading strategy, and the bid-ask spread of the pair. More liquid pairs, such as EUR/USD, are often recommended for retail investors due to ease of trading and lower likelihood of significant price changes on large orders.

 

 

Disclaimer

Derivative investments involve significant risks that may result in the loss of your invested capital. You are advised to carefully read and study the legality of the company, products, and trading rules before deciding to invest your money. Be responsible and accountable in your trading.

 

RISK WARNING IN TRADING
Transactions via margin involve leverage mechanisms, have high risks, and may not be suitable for all investors. THERE IS NO GUARANTEE OF PROFIT on your investment, so be cautious of those who promise profits in trading. It's recommended not to use funds if you're not ready to incur losses. Before deciding to trade, make sure you understand the risks involved and also consider your experience.