We assume that the Fed announces that it will take measures to raise interest rates. Buying orders for the U.S. dollar against major currencies quickly emerged in the market. The euro/dollar and the pound/dollar fell, while the dollar/swiss franc and the dollar/yen rose.
You choose to short the EUR/USD and are very happy to see that the trend of the exchange rate keeps you profitable, but when you are ready to light a cigar with satisfaction, you suddenly find that you choose to go long USD/JPY Your friends will earn more points than you.
You will ask, what is going on?
You compare the EUR/USD and USD/JPY charts and find that the USD/JPY has a greater range of changes. The USD/JPY broke through a major technical resistance level and gained more than 200 points, while the EUR/USD only fell by 100 points and did not break through a key support.
You will ask yourself, if the US dollar is fully supported by every market, then why is the euro/dollar trend weaker than the dollar/yen trend?
This is related to cross currency pairs. In this example, it is about Euro/Japanese Yen.
How does the cross currency pair affect the trend of the direct currency pair
When the USD/JPY broke through its main resistance level, the USD/JPY moved higher due to the double follower triggering stop-loss buying.
Since more USD/JPY buying will cause the yen to weaken, this may prompt the EUR/JPY (or other yen crosses) to also break through its main resistance level. Once stop-loss buying is triggered, it will attract a breakout market. Of traders entering the market, the EUR/JPY will rise further.
This will cause the euro to strengthen and slow the decline of the euro/dollar. Here, the euro/yen buying has taken a key role, which is why the decline of the euro/dollar has not appeared as big as the dollar/yen.
So, even if you are only trading major currency pairs involving the US dollar, cross trading will still affect your trading.