What Are Currency Pairs in Forex Trading?
Currency pairs show the exchange rate between two currencies, indicating how much of one currency is needed to buy another. The value changes based on how the currencies fluctuate against each other, influenced by factors like central bank actions and economic data.
What Is a Currency Pairing?
The forex market is extremely popular and hosts some of the most liquid markets you can trade.
Forex is just short for foreign exchange, and it basically means changing one currency into another. You’re probably familiar with this if you’ve ever gone abroad and had to use a different currency.
In forex markets we’re trading amounts in one currency for another. Therefore, the currencies are usually quoted and traded in pairs. That means each pair has two currencies, and the price we see is the exchange rate between those two currencies. In other words, how much one currency is worth in terms of the other currency.
Currency pairs always have a base currency and a quote currency. Another way to think about this is that the price you’re seeing in the market is the price of the base currency given in the quote currency. For example, the currency pair EUR/USD is giving us the price of one euro in dollars. In this case, one euro is quoted at $1.0712.
If I want to change my dollars into euros, that’s the price I’m going to pay. In that case, what happens if the price goes up to $1.0812?
Just like when you’re buying something in the shops, it means the euro has got more expensive. It’s gone up in value against the dollar, since you need to pay more dollars to get one euro. We could also say the euro has appreciated against the dollar, and if the price goes down we could say the euro has depreciated against the dollar.
On the other hand, you could also say the opposite for the dollar. If the euro has appreciated against the dollar, the dollar has depreciated against the euro, and vice versa. This is because the movements in a currency pair aren’t just determined by one currency, but by both of them.
It could be that something on the US side has affected the dollar, or something on the eurozone side has affected the euro, or both. This is one of the things that makes forex a great market to trade in, there’s more movement happening in both directions due to the influence of both currencies appreciating and depreciating.
The values of different currencies can be affected by a whole range of different factors. However, some important ones that will cause the most movement are:
- Central bank actions, such as interest rate changes or other actions affecting the money supply
- Fiscal policy from the government
- Economic data for the relevant economy
It’s always a good idea to keep an eye on the economic calendar so you know when these releases are coming out. They can cause lots of volatility in the markets.