What are the most volatile currency pairs in forex? Quite a few factors determine how profitable a currency pair is or how optimal it might be for trading or not.
One of them turns out to be “volatility,” a term that is thrown around a lot. This piece aims to explain what this term means entirely. Also, the most volatile currency pairs are highlighted in the list below.
Six of the most volatile currency pairs in the forex market will be listed below.
XAU/USD
XAU/USD, the currency code for Gold against the US Dollar, is widely considered a highly volatile pair.
Various intertwined factors fuel the volatility of the XAU/USD pair. Gold, often viewed as a safe-haven asset, tends to attract investors during times of economic uncertainty or market turmoil, leading to significant price fluctuations.
The role of the US Dollar as the world’s leading reserve currency amplifies this volatility. Changes in US economic policy or economic indicators can dramatically impact the dollar’s value, subsequently affecting the XAU/USD pair.
Inflation and interest rates also play crucial roles. Gold is a common hedge against inflation, meaning shifts in inflation rates or monetary policy, particularly in the US, can result in large movements in this currency pair.
Moreover, gold’s status as a commodity means that fluctuations in the broader commodity market can influence its price and, thus, the volatility of XAU/USD.
Lastly, major global events, economic data releases, and geopolitical changes can have immediate and drastic effects on the price of gold, adding to the pair’s volatility.
The combination of these factors means that XAU/USD often experiences significant price movements, making it a highly volatile pair in the forex market.
AUD/JPY
AUD/JPY currency pair is generally regarded as one of the most volatile currency pair in the market. It represents the Australian dollar against the Japanese yen.
In the Asian continent, the Japanese yen, on the one hand, is often used. The currency is very stable, making it a safe-haven currency.
Similarly, the commodity; gold, since its value appreciates over time, is a haven.
Investors turn to these in times of hardship for financial security.
Industries in Japan manufacture appliances, gadgets, cars, etc. All of these products have a high all year round, sustaining the demand for the currency.
As for the Australian dollar, its worth is heavily dependent on the economy of the nation’s large degrees of fluctuations.
This disparity between the two currencies leads to a high level of volatility.
NZD/JPY
This currency pair comprises the New Zealand dollar and the Japanese yen. As I pointed out above, the Japanese yen is a haven currency pair.
While the value of the New Zealand dollar is heavily reliant on the nation’s economic situation/ exportation of commodities.
Furthermore, changes in the price of these exports are bound to happen at certain intervals, leading to high levels of volatility.
AUD/USD
The American and Australian dollars respectively are the elements of the AUDUSD volatile currency pair. Forex traders also tend to call this pair the Aussie.
Moreover, the US dollar is a global currency because the United States because of a flexible and robust economy.
Contrarily, the Australian dollar is backed by the various sectors that constitute the nation’s economy.
GBP/EUR
The UK pound has been relatively stable against the euro since the Brexit vote. However, there are signs that the pound could weaken further as the UK prepares to leave the EU.
The UK government has said it will not pay any money to the EU until it leaves the bloc.
This means that the UK would lose access to the single market, which includes the free movement of people, services, and capital.
As a result, the pound’s value could fall against other currencies.
EUR/JPY
This pair tends to move up and down together because both countries use the same currency.
In addition, Switzerland is one of the world’s largest exporters of goods and services. As such, its economy is closely tied to the performance of the US economy.
Switzerland also has a large financial sector, so it is sensitive to changes in the US economy.
The Swiss franc is pegged to the US dollar, so when the US dollar rises, the Swiss franc falls. Conversely, when the US dollar declines, the Swiss franc rises.
What Is a Currency?
Starting from the basics is necessary, so what is a currency? We use them every day to conduct our various activities.
A currency is an official means of exchange in any country. The leaders always approve of this currency of every nation.
Before the initiation of recognized currencies, trade and barter used to be the norm.
Nowadays, even loads of digital currencies now exist! Bitcoin and Ethereum are the leading spearheads for cryptocurrency.
Which currency pair is the least volatile?
EUR/USD and USD/CHF are two of the least volatile currency pairs. The EUR/USD is undoubtedly the most traded pair daily.
It earns this title by accounting for over 20 percent of daily transactions in the forex market.
This is due to the robust economies of these two economies. Hence, liquidity is in excess, so spreads are low.
The USD/CHF, an alternative name for this pair, is “the Swissie.” This pair contains the US dollar against the Swiss Franc. Both of the currencies in this pair are stable currencies which leads to minimal fluctuations in price.
What Are Currency Pairs In Forex?
Pairs of various countries are traded/ compared against one another and are referred to as currency pairs. More precisely, the value of one nation’s currency is plotted against the other.
Generally, the value of every currency in the world fluctuates, though by a minute, Forex traders take advantage of these small changes, you could say, daily.
The economic state of a nation, inflation, interest rate, government policies, etc., affects the value of a currency.
What Is Volatility?
The most volatile currency pairs tend to move in opposite directions simultaneously. This means that the other will fall when one currency rises against another.
The volatility of a currency pair is a measure of how frequently the price of this pair changes. A pair that changes price rapidly has high volatility, while a currency pair that does not fluctuate aggressively is not.
The more stable the price of a currency pair is over a given time, the less volatile it is.
Forex traders must be careful when dealing with volatility, as it is a two-edged sword.
In volatile markets, large sums of money can be lost as quickly as it is made.
Factors That Affect The Volatility of Currency Pairs
A currency pair’s stability depends on the base and quoted currency pair’s stability.
Also, major news about economic changes or government policies will affect investors’ sentiments. For instance, when the COVID pandemic started, this triggered an increase in the market’s volatility.
The number of market participants can determine the volatility of a pair. This is the reason exotic currency pairs are so volatile.
The market participants being few leads to prices being altered easily. An example of a popularly traded exotic pair is the USD/ MXN.
Which Currency Pair is Most Predictable?
The currency pairs in forex are classified into three categories. They are; major, minors, and exotic pairs.
Pairs like EUR/USD and GBP/ USD are major currency pairs because the currency these pairs contain is that of renowned economies. Therefore, an influx of large amounts of liquidity because of the large participant trading these pairs they aren’t volatile; more predictable.
Exotic pairs only have a few people trading them, leading to highly volatile conditions. A few examples are USD/TRY USD/MXN, and USD/ZAR.
Summary; The Most Volatile Currency Pairs In Forex
Volatility is necessary on every excellent pair but only moderately. My advice would be to trade currency pairs with a good volatility balance. A solid example is the GBP/USD, which ensures risk is managed without compromising on returns.
On the other hand, pairs with very low volatilities aren’t ideal either. It takes prolonged periods to reach specific price ranges.