The best currency pairs are generally those that are both liquid and predictable. This means that they are easy to trade because there is usually a low risk of short selling and there is minimal volatility in the exchange rate.
Most of the most liquid foreign exchange pairs are made up of exporters who are generally able to sell their goods at a cheaper price to local retailers, and importers who can sell their goods in the same country at a higher price to retailers. As a result, the two groups tend to be in close contact with each other – especially with the U.S. exporter as many of the U.S. exporters are based overseas.
GBP to EUR and USD to GBP are the two most commonly traded currency pair pairs. The most stable currency pairs usually have very little or no demand and supply generated by speculators, exporters, and traders. Because all of the major countries listed above share significant trading relationships with the U.S., consistent liquidity is present in all of the major currencies used in international trade.
The biggest exception to this is the US dollar to GBP pair. In recent years, the U.S. dollar has been steadily losing its strength against major currencies, particularly against the pound and euro. Because of this, it has become more difficult for U.S. traders to trade with UK and euro denominated goods on a daily basis. As a result, more often than not, traders will either buy the U.S. currency and use it for trade purposes or the Euro and use it for trade purposes.
The reason why US traders are not as open to trades in the UK and euro pair is because they are unable to purchase these currencies at a discount due to low domestic liquidity. In fact, US traders are often forced to buy their own currency or accept a large spread in order to trade with their domestic market partners. There is some logic behind this, but it is largely based upon the fact that the U.S. economy is significantly larger than the economies of most of the other developed world countries. Because of this, the U.S. currency remains relatively undervalued against the euro and the pound in comparison.
The opposite is also true when you look at the other end of the spectrum and the opposite of the US dollar-GBP and USD to GBP pairing. relationship. These pairs often have a very large divergence between the supply and the demand of the two currencies that creates a situation where one country is able to purchase their own currency and the other country is forced to sell their currency to secure a good price.
An example of this is a country such as the United Kingdom, which is a very big exporter of goods and services but is unable to get its exports priced in the dollars of the major global trading centers. The United States is the single largest exporter of goods and services to many of the global trading centers and therefore can charge a very high price on its goods and services. For example, when it comes to U.S. goods and services, the prices are often twice as much as they are for goods sold to other countries in the United Kingdom. As a result, the U.K. must sell its own currency to buy back its own goods.
If this scenario occurs, the British dollar becomes undervalued against the euro and the United States dollar, allowing the United States to purchase its own goods and services. The same thing happens if the U.K. is forced to sell its own currency to buy back the U.S. currency, which will cause a further devaluation of the dollar against the euro and the British pound. The price of goods and services has been affected by this dynamic of buying and selling currencies in a variety of different ways.