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Chapter 3: Currency Pairs


What Are Currency Pairs?

In Forex trading, currencies are traded in pairs. Each pair consists of two currencies: the base currency and the quote currency. The value of a currency pair represents how much of the quote currency is needed to buy one unit of the base currency.

Understanding Currency Pair Quotes

When you see a currency pair quote, it looks like this: EUR/USD 1.1200. Here’s what it means:

  • EUR (Euro) is the base currency.
  • USD (US Dollar) is the quote currency.
  • 1.1200 is the exchange rate, indicating that 1 Euro can be exchanged for 1.1200 US Dollars.

Types of Currency Pairs

Major Pairs

Major pairs are the most traded currency pairs in the Forex market. They typically involve the US Dollar and another major currency. Major pairs are known for their liquidity and tight spreads. Some examples include:

  • EUR/USD (Euro/US Dollar)
  • USD/JPY (US Dollar/Japanese Yen)
  • GBP/USD (British Pound/US Dollar)
  • USD/CHF (US Dollar/Swiss Franc)
Screen displaying Forex currency pair quotes
Base currency vs quote currency

Minor Pairs

Minor pairs, also known as cross-currency pairs, do not involve the US Dollar. They feature major currencies paired with each other. While less liquid than major pairs, minor pairs still offer substantial trading opportunities. Examples include:

  • EUR/GBP (Euro/British Pound)
  • EUR/AUD (Euro/Australian Dollar)
  • GBP/JPY (British Pound/Japanese Yen)

Exotic Pairs

Exotic pairs consist of a major currency paired with a currency from a smaller or emerging economy. These pairs are less liquid and have wider spreads due to their lower trading volumes. Examples of exotic pairs include:

  • USD/TRY (US Dollar/Turkish Lira)
  • EUR/SEK (Euro/Swedish Krona)
  • GBP/ZAR (British Pound/South African Rand)
Infographic of major Forex currency pairs
Metatrader Market Watch

Factors Influencing Currency Pairs

Economic Indicators

Economic data such as GDP growth, unemployment rates, and inflation can significantly impact currency values. Positive economic reports often strengthen a currency, while negative reports can weaken it.

Interest Rates

Central banks set interest rates, which can influence currency prices. Higher interest rates offer better returns on investments in a currency, attracting traders and increasing its value.

Political Events

Political stability and events such as elections, government policies, and international relations can affect currency values. Traders monitor political news closely to anticipate market movements.

Market Sentiment

Market sentiment reflects the overall attitude of traders toward a particular currency. Factors like risk appetite, economic outlook, and geopolitical tensions can shape market sentiment and drive currency movements.

Conclusion

Understanding currency pairs is fundamental to Forex trading. By recognizing how pairs are quoted and the factors influencing their movements, you can make informed trading decisions. Stay tuned as we explore more advanced topics and strategies in our comprehensive Forex trading guide.


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