Cross Pairs: Definition, The Impact, Factors Influencing, and Effective Strategies

Cross pairs do not involve the US dollar, offering traders unique opportunities to capitalize on movements between two other major currencies. Understanding cross currency pairs is essential for broadening your trading horizons. 

These pairs open up new opportunities for traders to profit from the relative strength of two major currencies. In this guide, we’ll explore what cross currency pairs are, how they impact the forex market, the factors that influence them, and practical trading strategies you can use.

What Are Cross Pairs?

A cross pair (or cross currency pair) is a currency pair that does not include the US dollar (USD). While most currency pairs involve the USD as one of the components, cross pairs involve two major currencies that are traded against each other, excluding the US dollar.

For example:

EUR/GBP – Euro/British Pound.

EUR/JPY – Euro/Japanese Yen.

GBP/JPY – British Pound/Japanese Yen.

These cross pairs in FOREX89 are significant in the forex market because they allow traders to speculate on the value of one currency against another, without the direct influence of the US dollar.

Now that we understand the definition and characteristics of cross currency pairs, let’s examine their impact on the forex market.

The Impact of Cross Pairs on the Forex Market

Cross pairs forex play a crucial role in the forex trading market by offering more diversity and opportunities for traders. Unlike major pairs that include the USD, cross pairs allow traders to speculate on currency movements without direct exposure to the US Dollar. Additionally, traders on platforms like XM Forex often explore cross pairs alongside commodities like XAG/USD (Silver vs. US Dollar) to diversify their trading strategies.

How Cross Pairs Impact the Forex Market

Cross pairs can impact the forex trading market in several ways:

Liquidity and Volatility: Although cross pairs typically have less liquidity compared to major currency pairs like EUR/USD or GBP/USD, they still attract significant trading volumes. Cross pairs can sometimes experience higher volatility, especially when news events or economic data affect one of the currencies in the pair. Many traders at XM Forex also trade XAG/USD, which exhibits similar volatility due to its sensitivity to economic and geopolitical factors.

Indirect Exposure to USD: Even though cross pairs do not include the USD, they can still be indirectly influenced by USD fluctuations. For example, changes in the USD can impact the relative strength of other currencies like the Euro or British Pound, which in turn affects the price of the cross pair. Similarly, commodities like XAG/USD can be affected by USD strength, as silver prices often move inversely to the dollar.

Market Diversification: Trading cross pairs gives forex traders the ability to diversify their portfolios, reducing exposure to the USD and potentially lowering risk in certain market conditions. Many traders also incorporate XAG/USD into their strategies, as precious metals often act as a hedge against currency fluctuations.

Like any other currency pair, in addition to its impact on the forex trading market, it is also important to understand the factors that affect cross pairs in order to make informed decisions.

Factors Influencing Cross Pairs in Forex Trading

There are many factors that affect cross pairs in the forex trading market. Understanding these factors is essential for traders looking to profit from movements in cross pairs.

Economic Data: Economic indicators such as GDP growth, inflation, and employment data from the countries involved in the cross pair can significantly affect currency values. For example, strong economic performance in the Eurozone can cause the EUR to rise against the GBP in the EUR/GBP pair. Similarly, economic uncertainty can drive demand for safe-haven assets like XAG/USD, as investors move toward silver during market instability.

Interest Rates: Central banks in the countries involved in the cross pair often set interest rates that impact the currency value. A rise in interest rates in the Eurozone, for example, can lead to an appreciation of the Euro against other currencies, including the British Pound or Japanese Yen. Many traders at XM Forex also monitor interest rate decisions to anticipate moves in pairs like XAG/USD, as precious metals tend to rise when interest rates remain low.

Geopolitical Events: Political instability or major geopolitical events in countries involved in the currency pair can cause volatility. For instance, Brexit negotiations have had a significant impact on the GBP/EUR exchange rate, as political decisions in the UK influence the British Pound. Similarly, global uncertainty often increases demand for XAG/USD, as silver is considered a safe-haven asset during crises.

Market Sentiment: Market perception and sentiment towards a currency or country can influence cross pairs. Positive sentiment toward the Euro or negative sentiment toward the Japanese Yen can lead to fluctuations in EUR/JPY, for instance. Traders on XM Forex also track market sentiment in commodities, as risk aversion can lead to increased demand for XAG/USD.

By monitoring these factors, traders can better predict currency movements and implement the following effective strategies for trading cross pairs.

Effective Strategies for Trading Cross Pairs in Forex Trading

Trading cross pairs requires a tailored strategy due to the unique characteristics and influences on these currency pairs. Below are some effective strategies for trading cross pairs in the forex trading market:

Fundamental Analysis

Understanding the economic indicators and news events that impact the countries involved in the cross pair is essential. Keep an eye on central bank announcements, employment reports, inflation data, and geopolitical developments. This can help you anticipate currency movements and make informed trading decisions. Similarly, traders at XM Forex analyze economic data to predict XAG/USD movements, as silver prices are influenced by inflation and global monetary policy.

Technical Analysis

As with any forex trading, technical analysis is a valuable tool for trading cross pairs. Use chart patterns, trendlines, moving averages, and indicators like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) to identify potential entry and exit points. Many traders apply these same techniques when analyzing XAG/USD, as silver prices often follow technical trends similar to forex pairs.

Risk Management

Cross pairs can experience higher volatility, making it essential to implement proper risk management techniques. Set stop-loss orders to limit potential losses and avoid over-leveraging your trades. Always ensure that you are managing risk effectively to protect your capital. Many traders on XM Forex use risk management strategies when trading both cross pairs forex and XAG/USD, as silver’s volatility requires careful position sizing.

Focus on Major Cross Pairs

While there are many cross pairs to choose from, focusing on the most liquid and actively traded cross pairs, such as EUR/GBP or EUR/JPY, can increase your chances of success. These pairs typically offer better liquidity, tighter spreads, and more reliable price movements. Similarly, traders often compare liquidity in forex pairs with that of XAG/USD, as silver can experience rapid price movements in high-volume trading sessions.

Keep an Eye on Correlations

Cross pairs can often show correlations with major currency pairs. For instance, EUR/GBP may be correlated with EUR/USD and GBP/USD. Understanding these correlations can help you make more informed decisions when trading cross pairs. Likewise, XAG/USD often correlates with the USD Index (DXY) and inflation trends, making it an important asset to track alongside cross pairs in forex trading.

Overall, cross pairs are an important and unique aspect of the forex market, offering traders the opportunity to trade currencies without the influence of the US dollar. Whether you are a beginner or an experienced trader, understanding cross pairs can provide new opportunities and diversification in your trading strategy. In the next article, readers can learn more about Trading Exotic