May 20, 2021
Understanding forex markets: What are currency pairs?
The forex markets (also known as foreign exchange or currency markets) are extremely popular and host some of the most liquid assets you can trade. Let’s get to know this market a little bit better.
The forex market consists of currencies that are usually traded in pairs. This means, in the forex market we are typically trading one currency against another.
For example, the most popular currency pair to trade is EUR/USD. This is trading two currencies, the euro and the US dollar, against each other.
When we look at a currency pair like EUR/USD, the order of the currencies listed in the pair matters to us. The first one is known as the base currency and the second one is known as the quote currency.
In the EUR/USD pairing, the euro is the base currency and the US dollar is the quote currency.
Therefore, the price that is quoted is showing how much of the quote currency is needed to exchange for one unit of the base currency. So, if the price of EUR/USD is currently 1.18, this means €1 is equivalent to $1.18.
This number, otherwise known as the exchange rate, will change over time. This can happen if the value of either or both currencies change.
For example, if the US dollar increases in value and the euro stays the same, the exchange rate will reduce as fewer dollars are needed to exchange for one euro.
On the other hand, if the euro increases in value and the US dollar stays the same, the exchange rate will increase as more dollars are required to exchange for one euro.
Therefore, if both currencies are changing in value, the exchange rate will adjust to the relative changes in both currencies. This is essentially what takes place in the financial markets, as we see forex pairs moving up and down in value all the time.
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