If you decide to pair a currency with strong FX rates with one that offers weaker rates, the strong currency will normally prevail. You should keep this in mind when you first choose your currency pairs.
Matching Pairs by FX Rates
FX rates trading is always done in pairs. Each trade you enter involves two sides. You purchase one currency and dispose of another. Your bet is that one currency’s value will exceed the other currency’s value. This indicates that it would make sense to pair a strong currency with a weaker one. The one fact you can be sure of is that economic predictions linked to the major currency countries do not suddenly change. Economic data releases for the most traded currencies are released on a daily basis. This could be viewed as a scorecard for those countries that are on the list of major currencies. When the reports are positive, the economic climate of the country is strong. If it indicates negativity, the country’s economic performance has been poor.
This data should not be the only reason for pair currencies. Countries with strong economic reports may prompt the central bank to increase the interest rates and this will increase the currency value. In contrast, the countries that report weak economic performance do not provide their central bank with much room for manipulating the interest rates. If the data released is very weak, the central bank may consider decreasing its interest rates. Forex traders remain aware of interest rate changes in the different countries because it could affect their trades enormously. This is because a substantial interest rate hike will attract more investors to that particular currency and country.
Use Interest Rates
Besides keeping your eye on the economic status of a country, you should compare the direction the current interest rate is taking and then make a decision on the pair you wish to trade. An example is the EUR/GBP pair which has traditionally been a range-bound pair. The pair experienced a breakout during 2006. The breakout appeared on the upside as the European Zone decided to increase its interest rates due to the substantial growth in the zone.
The interest rate increase pushed the currency pair to a trending pair from a range-bound pair in a few short months. This was an easy shift for traders to predict and made the choice of this currency pair quite simple as one was very strong when compared to the other. The current weaknesses and strengths experienced by two currencies could remain in effect for long periods whilst the economies evolve. This is a simple method that provides traders an edge in the trading market when they pair strong and weak currencies.
To be successful at this method of trading, it is important that you devise and implement a suitable trading strategy and stick to it. It will be necessary for you to keep up to date on economic data releases for the currency pair. This is a good method of remaining alert to interest rate movements or potential changes between the currencies in your pair.