Understanding Currency Pairs

 

How are Currencies Priced?

When the price of a currency is quoted, it is quoted in terms of a pair with another currency.

All forex is quoted in terms of one currency versus another.

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The base currency is the currency on the left of the currency pair and the counter currency is on the right.

This is critical, because no currency has any kind of “absolute” value if it is trade on the international Forex market.

Nothing is pegged to gold, or to some other fixed determination of worth. Every currency on the market “floats” with respect to all the others.

So, for example, in GBP/USD, GBP is the ‘base’ currency and USD the ‘counter’ currency.

Forex price movements are triggered by currencies either:

  • appreciating in value (strengthening), or

  • depreciating in value (weakening).

If the price of GBP/USD for example were to fall, this would indicate that the counter currency (US dollars) was appreciating, whilst the base currency (British pounds) was depreciating.

 

Types of Currency Pairs

The most traded currency pairs in the world are called the Majors. They are:

  • EUR/USD

  • USD/JPY

  • GBP/USD

  • AUD/USD

  • USD/CHF, and

  • USD/CAD.

These are by far the most liquid currency pairs, and they account for about 85 per cent of all forex trading.

The pair USD-EUR is not traded for historical reasons. Some pairs have nicknames, which are useful to learn for understanding trading discussion.

Nicknames for Forex Pairs

The GBP/USD pairing is known by traders as ‘the cable’ – at one time an undersea cable connected the trading floors in London and New York to synchronise trading in this currency pair. 

Origins of some other nicknames for pairs are more obscure, but the:

  • EUR/USD is sometimes called ‘the Chunnel’,

  • EUR/GBP is occasionally referred to as the ‘Loonie’, and

  • USD/CAD is (rarely) referred to as the ‘The Funds’.

 

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