Minor Pairs
What Are Minor Pairs?
Minor pairs, often called "crosses," are currency pairs in the foreign exchange market that do not include the U.S. Dollar (USD) but do include at least one of the other major currencies (EUR, GBP, or JPY).
In the world of forex trading, currency pairs are categorized into three main groups: Majors, Minors (or Crosses), and Exotics. **Minor pairs** hold the middle ground. They are currency pairs that do *not* contain the U.S. Dollar (USD) but consist of the other world's most significant currencies—primarily the Euro (EUR), Japanese Yen (JPY), and British Pound (GBP). The most common examples of minor pairs include the Euro against the British Pound (EUR/GBP), the Euro against the Japanese Yen (EUR/JPY), and the British Pound against the Japanese Yen (GBP/JPY). While the US Dollar is the world's reserve currency and dominates global trade, minor pairs allow traders to express views on the relative strength of other major economies directly. Historically, if a person wanted to exchange Pounds for Yen, they would first have to convert Pounds to Dollars, and then Dollars to Yen. Today, "cross currency" markets allow for direct exchange, but the legacy of the Dollar's dominance means these pairs are still referred to as "minors" relative to the "majors" that involve the USD. Despite the name, trading volume in these pairs is massive, and they are a staple for professional forex traders.
Key Takeaways
- Minor pairs consist of major currencies trading against each other without the US Dollar (e.g., EUR/GBP, EUR/JPY).
- They are generally less liquid than major pairs (like EUR/USD) but more liquid than exotic pairs.
- Spreads on minor pairs are typically wider than on major pairs due to slightly lower trading volume.
- They offer diversification for forex traders looking to avoid USD-specific volatility.
- EUR/JPY, GBP/JPY, and EUR/GBP are among the most actively traded minor pairs.
- Technical trends on minor pairs can sometimes be cleaner as they are not driven by US economic data.
How Minor Pairs Work
Minor pairs function just like any other currency pair: the first currency is the base, and the second is the quote. If you buy EUR/GBP, you are buying Euros and selling British Pounds. The price tells you how many Pounds it costs to buy one Euro. Since minor pairs exclude the USD, they are mathematically derived from the major pairs. For example, the rate of EUR/JPY is essentially calculated by multiplying EUR/USD by USD/JPY. * (EUR/USD) × (USD/JPY) = EUR/JPY * (1.10) × (150.00) = 165.00 This relationship means that minor pairs are sensitive to the price movements of their respective major pairs. However, they also develop their own distinct trends. Because they bypass the USD, they are excellent vehicles for trading regional economic stories (like the Eurozone vs. UK post-Brexit economy) without having to worry about what the Federal Reserve is doing with US interest rates.
Key Examples of Minor Pairs
The most popular minor pairs typically involve the Euro, Yen, or Pound:
- **EUR/GBP (Euro / British Pound):** Often nicknamed "Chunnel" (Channel Tunnel). Very popular due to the economic proximity of the UK and Eurozone.
- **EUR/JPY (Euro / Japanese Yen):** A barometer for global risk sentiment, often rising when markets are optimistic.
- **GBP/JPY (British Pound / Japanese Yen):** Nicknamed "The Beast" or "The Widow-maker" due to its extreme volatility. A favorite among day traders.
- **EUR/CHF (Euro / Swiss Franc):** Historically significant, especially regarding Swiss National Bank interventions.
- **AUD/JPY (Australian Dollar / Japanese Yen):** Often viewed as a pure "risk-on/risk-off" sentiment gauge.
Advantages of Trading Minor Pairs
Traders flock to minor pairs for several strategic reasons. First is **diversification**. If your entire portfolio consists of EUR/USD, GBP/USD, and USD/JPY, you are heavily exposed to the US Dollar. If the USD spikes unpredictably, all your positions might move against you at once. Minor pairs allow you to trade forex while neutralizing USD exposure. Second, minor pairs offer **volatility opportunities**. Pairs like GBP/JPY are famous for large price swings, which can translate to significant profits (or losses) for short-term traders. Third, they allow for **targeted fundamental analysis**. If you believe the European economy will outperform the UK economy, shorting EUR/USD is an imperfect way to express that view because a strong Dollar could ruin the trade. Buying EUR/GBP is a much more precise "pure play" on that specific thesis.
Disadvantages of Minor Pairs
The main drawback of minor pairs is **liquidity and cost**. Because they are traded less frequently than the majors, liquidity providers (banks) often charge wider spreads. While a spread on EUR/USD might be 1 pip or less, the spread on GBP/AUD might be 3-5 pips. This higher "cost of business" can eat into profits, especially for scalpers. Additionally, "The Beast" (GBP/JPY) and other crosses can be prone to **false breakouts** and erratic movements during times of low liquidity, such as the period between the New York close and the Tokyo open.
Real-World Example: Trading the Cross
A trader observes that the Bank of Japan is keeping interest rates extremely low, while the Bank of England is raising rates to fight inflation. This fundamental divergence suggests the Pound should strengthen against the Yen.
Important Considerations: The "Synthetic" Nature
Remember that because crosses are mathematically derived from majors, arbitrage bots keep them in line. If EUR/USD shoots up and USD/JPY stays flat, EUR/JPY *must* go up. Watching the major pairs that constitute your minor pair can give you leading signals. If USD/JPY is hitting major resistance while EUR/USD is falling, EUR/JPY is likely to drop hard.
FAQs
No. Minor pairs involve major global currencies (EUR, GBP, JPY, AUD, CHF) trading against each other. Exotic pairs involve a major currency trading against a currency from a developing or emerging economy (e.g., USD/TRY - Turkish Lira, or USD/MXN - Mexican Peso). Exotic pairs have much lower liquidity and much higher spreads than minors.
Spreads are wider because trading volume is lower compared to major pairs like EUR/USD. Market makers take on slightly more risk holding these positions and may have to route the trade through two major pairs (e.g., selling EUR/GBP by selling EUR/USD and buying GBP/USD) to hedge, incurring double costs which are passed to the trader.
GBP/JPY is technically a minor pair (or cross pair) because it does not include the USD. However, due to its high volume and popularity among retail traders, it is often grouped prominently on trading platforms. It is widely known for its high volatility.
The best time usually depends on the currencies involved. EUR/GBP is most active during the London session. AUD/JPY sees good volume during the Asian (Tokyo) session due to the Australian and Japanese time zones. Generally, the overlap between London and New York sessions provides the highest overall liquidity.
Yes. Just like major pairs, minor pairs are subject to rollover or swap rates. If you buy a currency with a high interest rate against one with a low interest rate (e.g., Buying GBP/JPY when UK rates are 5% and Japan rates are 0%), you will earn positive swap (carry) for holding the position overnight.
The Bottom Line
Minor pairs are an essential tool for the sophisticated forex trader. They unlock the ability to trade specific economic relationships between major economies like the Eurozone, UK, Japan, and Australia without the interference of the US Dollar. While they come with slightly higher transaction costs (spreads) compared to the majors, the strategic value of "pure play" exposure and diversification often outweighs the cost. For beginners, it is often best to start with major pairs to learn the ropes where liquidity is highest and volatility is generally more managed. However, as you advance, adding pairs like EUR/JPY or EUR/GBP to your watchlist can provide trading opportunities when the USD pairs are consolidating or chopping sideways. Always be mindful of the volatility, especially with Yen crosses, and manage your risk accordingly.
Related Terms
More in Currencies
At a Glance
Key Takeaways
- Minor pairs consist of major currencies trading against each other without the US Dollar (e.g., EUR/GBP, EUR/JPY).
- They are generally less liquid than major pairs (like EUR/USD) but more liquid than exotic pairs.
- Spreads on minor pairs are typically wider than on major pairs due to slightly lower trading volume.
- They offer diversification for forex traders looking to avoid USD-specific volatility.