A cross-currency pair is a forex pair that does not include the US dollar. This type of currency quote shows the value of one currency against another without first converting through USD. Many traders focus on majors because they dominate market volume, but understanding cross pairs can add depth to a trading strategy.
The difference between cross and major currency pairs extends beyond whether the USD is involved. It affects liquidity, spreads, volatility, and even how economic news impacts price movements. For traders seeking to diversify, trading cross-currency pairs in forex can offer fresh opportunities and exposure to unique market conditions.
Cross pairs have grown in popularity with faster trading systems and improved forex market liquidity. They are no longer secondary instruments but active parts of many institutional and retail portfolios.
Understanding Cross-Currency Pairs in Forex
A cross-currency pair connects two non-USD currencies in a direct exchange rate. Before modern electronic trading, most transactions between such currencies had to be converted to USD first, which added extra steps and costs.
Today, traders can deal directly in pairs such as EUR/GBP, AUD/JPY, GBP/JPY, and EUR/CHF. Each pair reflects the relationship between two economies without the stabilizing role of the US dollar. This can make movements sharper and sometimes less predictable.
Cross pairs generally fall into categories:
- Euro crosses such as EUR/GBP, EUR/JPY, EUR/AUD
- Yen crosses such as GBP/JPY, AUD/JPY, EUR/JPY
- Other crosses like GBP/CHF, AUD/NZD, CAD/CHF
Each type reacts differently to economic data, central bank decisions, and geopolitical events. For example, EUR/GBP will often move on Bank of England rate changes or European Union economic releases.
What Are Major Currency Pairs?
Major currency pairs always include the US dollar and another heavily traded currency. These pairs dominate global trading volume and usually have the tightest spreads.
Examples of major pairs include EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, and NZD/USD. They attract large institutional flows, which increases forex market liquidity and improves execution speed.
The heavy influence of US economic policy means these pairs react strongly to Federal Reserve interest rate decisions, employment data, and inflation reports. For many traders, majors are the starting point because of their stability and the abundance of available market analysis.
Key Difference Between Cross and Major Currency Pairs
The most obvious difference between cross and major currency pairs is the presence of the US dollar. However, this single change creates broader distinctions in trading conditions.
Majors generally have deeper liquidity, making them more suitable for large orders or short-term scalping. Cross pairs, while still liquid, may see spreads widen during less active market sessions.
Currency pair volatility also differs. Crosses can experience stronger swings since they are driven by the relative strength between two currencies without USD acting as a stabilizing factor. For instance, GBP/JPY is known for high volatility, offering big profit potential but also greater risk.
News sensitivity varies as well. Majors are driven mainly by US economic releases, while cross pairs are influenced more by regional events from both currencies involved.
How Cross Currency Pairs Are Quoted?
In a cross-currency pair, the first currency is the base and the second is the quote. For example, in EUR/JPY, the euro is the base currency, and the Japanese yen is the quote currency.
If EUR/JPY is trading at 162.50, it means one euro is worth 162.50 yen. Traders then speculate on whether this value will rise or fall based on economic conditions, central bank actions, or market sentiment.
Trading cross-currency pairs in forex requires monitoring both economies. For example, AUD/JPY traders need to watch Australian trade data, Reserve Bank of Australia policy, and Japanese inflation figures.
The Indirect Role of the US Dollar
Even though cross pairs do not include the USD, the US dollar still influences their movement. This happens because each currency has its own relationship with the USD.
For instance, if the USD strengthens against both the EUR and GBP, the EUR/GBP may remain stable. However, if the USD weakens against one but not the other, the cross pair could move sharply.
This indirect effect means that even when trading crosses, global US dollar trends remain relevant for managing currency pair volatility.
Advantages of Trading Cross-Currency Pairs
Cross pairs can offer traders several advantages:
- Access to unique trading opportunities outside of USD
- Potential for trends based on regional rather than US events
- Diversification of portfolio exposure
- Ability to target specific economic relationships
For example, a trader expecting Japanese yen weakness may choose AUD/JPY instead of USD/JPY to take advantage of a stronger Australian dollar outlook.
Challenges in Trading Cross Pairs
While trading cross-currency pairs in forex can be rewarding, it also presents risks. Wider spreads increase costs, especially during low liquidity periods such as late US hours.
Some cross-pairs show unpredictable currency pair volatility. Political developments, surprise central bank moves, or economic data can trigger sudden swings.
Gap risk is also higher for certain crosses, particularly on Monday openings after weekend news. This makes careful position sizing essential.
Strategies for Cross-Currency Pair Trading
One effective approach is relative strength analysis. This involves comparing the performance of multiple currencies to find the strongest and weakest, then pairing them in a trade.
Another method is trading interest rate differentials. Pairs like NZD/JPY or AUD/JPY have historically been used for carry trades, where traders borrow low-yield currencies to invest in high-yield ones.
Technical strategies also work well. Traders often use moving averages, price action, and support-resistance levels to plan entries and exits. However, given the volatility, stop-loss orders may need more breathing room compared to majors.
When Majors Might Be the Better Choice
Majors can be more suitable than crosses in certain cases:
- When you need tighter spreads for scalping
- If you rely on deep forex market liquidity for larger trades
- When trading around major US economic events
New traders often focus on majors first to learn market behavior without the added complexity of monitoring two non-USD economies at once.
Final Thoughts
A cross-currency pair offers a way to trade two currencies without the US dollar, opening up unique opportunities and challenges. The difference between cross and major currency pairs goes beyond USD involvement, affecting liquidity, spreads, and volatility.
By understanding these dynamics, traders can make informed decisions on when to trade crosses and when to stick with majors. Combining knowledge of the forex market liquidity, regional economic factors, and currency pair volatility can help build a balanced and profitable trading strategy.
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I’m Kashish Murarka, and I write to make sense of the markets, from forex and precious metals to the macro shifts that drive them. Here, I break down complex movements into clear, focused insights that help readers stay ahead, not just informed.