Many traders focus solely on major currency pairs like EUR/USD, GBP/USD, and USD/JPY, believing they offer the best opportunities for profit. However, cross currency pairs (those that do not involve the US dollar) present an alternative that can be just as rewarding when understood properly.
Trading cross pairs comes with unique advantages, such as reduced exposure to US dollar fluctuations and access to different economic regions. However, they also carry risks, including higher volatility and lower liquidity compared to major pairs.
This article provides an in-depth look at what cross currency pairs are, how they function, their benefits and challenges, and whether they are worth trading. By the end, traders will have a clear understanding of how to approach cross pairs strategically.
What Are Cross Currency Pairs?
Cross currency pairs, also known as cross pairs, are forex pairs that do not include the US dollar. Instead, they consist of two other major or minor currencies. These pairs allow traders to engage in the forex market without relying on the strength or weakness of the US dollar.
For example:
✅ EUR/GBP – The Euro against the British Pound
✅ AUD/JPY – The Australian Dollar against the Japanese Yen
✅ EUR/CHF – The Euro against the Swiss Franc
Historically, most currency exchanges required conversion into US dollars before trading between two other currencies. Cross pairs eliminate this step, allowing for direct exchange between two non-USD currencies.
Major Cross Currency Pairs
While major currency pairs always include the US dollar, cross currency pairs derive their importance from major economies and global trade flows. Some of the most traded cross pairs include:
Euro Crosses
✅ EUR/GBP – Influenced by economic relations between the Eurozone and the United Kingdom.
✅ EUR/JPY – A highly volatile pair, often reflecting risk sentiment in global markets.
✅ EUR/CHF – A stable pair, as the Swiss Franc is known for its role as a safe-haven currency.
Yen Crosses
✅ AUD/JPY – A risk-sensitive pair often influenced by commodity prices and global risk sentiment.
✅ GBP/JPY – Known for its high volatility, making it attractive to aggressive traders.
✅ CAD/JPY – A pair affected by oil prices, as Canada is a major oil exporter.
Other Notable Crosses
✅ GBP/AUD – Represents the strength of the UK economy relative to Australia’s.
✅ NZD/JPY – A pair often linked to global risk appetite and commodity market trends.
✅ EUR/AUD – A cross affected by both European economic conditions and Australia’s commodity exports.
Why Trade Cross Currency Pairs?
Cross currency pairs offer several benefits that can enhance a trader’s portfolio. Here are the key reasons traders consider them:
1. Reduced Dependence on the US Dollar
Major forex pairs revolve around the US dollar, which means traders are constantly exposed to economic events and policies from the United States. Trading cross pairs allows traders to focus on the relative strength between other global economies instead.
For example, a trader who believes the European economy will outperform the UK economy can trade EUR/GBP instead of trying to speculate on EUR/USD or GBP/USD.
2. Increased Trading Opportunities
By incorporating cross currency pairs, traders gain access to additional market movements that are independent of US economic data. This means more potential trades and opportunities, even when major pairs are in a period of low volatility.
For instance, if EUR/USD and GBP/USD are both stagnant, a trader may find strong movement in EUR/GBP due to economic news from Europe or the UK.
3. Access to Unique Market Trends
Certain cross pairs reflect economic trends that are not always visible in major pairs. For example:
✅ AUD/JPY and NZD/JPY are highly correlated with global risk sentiment. When markets are optimistic, these pairs tend to rise. When fear spreads, they decline.
✅ EUR/CHF is often used as a safe-haven trade, with traders moving into Swiss Francs during times of uncertainty.
These unique trends allow traders to diversify their strategies beyond simple dollar-based trades.
Challenges of Trading Cross Currency Pairs
Despite their advantages, cross pairs come with unique risks that traders must understand before diving in.
1. Wider Spreads and Lower Liquidity
Many cross currency pairs have lower trading volumes compared to major pairs, leading to wider spreads (the difference between bid and ask prices). This can make trading more expensive and reduce the profitability of short-term trades.
For example, EUR/USD might have a spread of 0.6 pips, while EUR/GBP could have a spread of 2.0 pips, increasing the cost of entry and exit.
2. Higher Volatility in Certain Crosses
Some cross pairs, especially those involving the Japanese Yen or British Pound, are significantly more volatile than major pairs.
✅ GBP/JPY is often called the “Dragon” due to its large price swings.
✅ AUD/JPY can experience strong moves based on changes in commodity prices and risk sentiment.
Traders need to adjust their risk management strategies when trading volatile cross pairs, ensuring stop-loss levels and position sizing reflect the increased price fluctuations.
3. Complex Economic Influences
Unlike major pairs that primarily respond to US economic data, cross pairs are influenced by two separate economies, making analysis more complex.
For example, trading EUR/GBP requires keeping track of both Eurozone and UK economic data, central bank policies, and geopolitical factors such as Brexit developments.
Successful trading of cross pairs demands a broader understanding of global economic trends rather than focusing on a single country’s policies.
Best Strategies for Trading Cross Currency Pairs
To trade cross pairs successfully, traders need a structured approach that accounts for volatility, economic influences, and price movements.
1. Use Fundamental Analysis
Since cross pairs are heavily influenced by their respective economies, fundamental analysis plays a crucial role. Traders should monitor:
✅ Interest Rate Decisions – Central banks like the European Central Bank (ECB), Bank of England (BoE), and Bank of Japan (BoJ) impact currency strength.
✅ Economic Reports – GDP growth, employment data, and inflation affect relative currency strength.
✅ Political Events – Brexit negotiations, trade deals, and geopolitical risks can shift cross pair movements.
For example, if the Bank of England hints at raising interest rates while the ECB remains dovish, GBP/EUR may rise in anticipation of higher yields.
2. Apply Technical Analysis
Since cross pairs often have unique price movements, technical analysis can help identify entry and exit points.
✅ Support and Resistance Levels – Identifying key price levels where price reversals are likely.
✅ Moving Averages – Using the 50-day and 200-day moving averages to determine trend direction.
✅ Momentum Indicators – RSI (Relative Strength Index) and MACD (Moving Average Convergence Divergence) can signal overbought or oversold conditions.
For example, if EUR/GBP is approaching a strong resistance level, traders may look for a price rejection before entering a short position.
3. Adjust Risk Management
Given the higher volatility and wider spreads of cross pairs, traders should:
✅ Use Smaller Position Sizes – To account for increased price swings.
✅ Set Wider Stop-Losses – To avoid being stopped out by normal market fluctuations.
✅ Monitor Overnight Swaps – Some cross pairs have high overnight swap rates, affecting long-term trades.
For instance, holding AUD/JPY overnight may result in positive or negative swap fees depending on interest rate differentials.
Are Cross Currency Pairs Worth Trading?
For traders who are willing to study their characteristics, apply risk management strategies, and stay updated on global economic trends, cross pairs can be a valuable addition to a forex portfolio.
Are you ready to explore cross currency trading? Join MS Africa Academy today and gain expert insights into advanced forex strategies, risk management techniques, and hands-on trading experience. Take your forex journey to the next level!
