What Is a Currency Pair?

A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency.

Currency pairs compare the value of one currency to another—the base currency (or the first one) versus the second or the quote currency. It indicates how much of the quote currency is needed to purchase one unit of the base currency. Currencies are identified by an ISO currency code, or the three-letter alphabetic code they are associated with on the international market. So, for the U.S. dollar, the ISO code would be USD.

KEY TAKEAWAYS

A currency pair is a price quote of the exchange rate for two different currencies traded in FX markets.

When an order is placed for a currency pair, the first listed currency or base currency is bought while the second listed currency in a currency pair or quote currency is sold.

The EUR/USD currency pair is considered the most liquid currency pair in the world. The USD/JPY is the second most popular currency pair in the world.

 

Understanding Currency Pairs

Trading currency pairs is conducted in the foreign exchange market, also known as the forex market. It is the largest and most liquid market in the financial world. This market allows for the buying, selling, exchanging, and speculation of currencies. It also enables the conversion of currencies for international trade and investment. The forex market is open 24 hours a day, five days a week (including most holidays), and sees a huge amount of trading volume.

All forex trades involve the simultaneous purchase of one currency and sale of another, but the currency pair itself can be thought of as a single unit—an instrument that is bought or sold. When you buy a currency pair from a forex broker, you buy the base currency and sell the quote currency. Conversely, when you sell the currency pair, you sell the base currency and receive the quote currency.

Currency pairs are quoted based on their bid (buy) and ask prices (sell). The bid price is the price that the forex broker will buy the base currency from you in exchange for the quote or counter currency. The ask—also called the offer—is the price that the broker will sell you the base currency in exchange for the quote or counter currency.

When trading currencies, you're selling one currency to buy another. Conversely, when trading commodities or stocks, you're using cash to buy a unit of that commodity or a number of shares of a particular stock. Economic data relating to currency pairs, such as interest rates and economic growth or gross domestic product (GDP), affect the prices of a trading pair.

Major Currency Pairs

A widely traded currency pair is the euro against the U.S. dollar or shown as EUR/USD. In fact, it is the most liquid currency pair in the world because it is the most heavily traded.1 The quotation EUR/USD = 1.2500 means that one euro is exchanged for 1.2500 U.S. dollars. In this case, EUR is the base currency and USD is the quote currency (counter currency). This means that 1 euro can be exchanged for 1.25 U.S. dollars. Another way of looking at this is that it will cost you $125 to buy 100 euros.

There are as many currency pairs as there are currencies in the world. The total number of currency pairs that exist changes as currencies come and go. All currency pairs are categorized according to the volume that is traded on a daily basis for a pair.

The currencies that trade the most volume against the U.S. dollar are referred to as the major currencies, which include:

EUR/USD or the Euro vs. the U.S. dollar
USD/JPY or dollar vs. the Japenese yen
GBP/USD or the British pound vs. the dollar
USD/CHF or the Swiss franc vs. the dollar
AUD/USD or the Australian dollar vs. the U.S. dollar
USD/CAD or the Canadian dollar vs. the U.S. dollar

The final two currency pairs are known as commodity currencies because both Canada and Australia are rich in commodities and both countries are affected by their prices. The major currency pairs tend to have the most liquid markets and trade 24 hours a day Monday through Thursday. The currency markets open on Sunday night and close on Friday at 5 p.m. U.S. Eastern time.2

Minors and Exotic Pairs

Currency pairs that are not associated with the U.S. dollar are referred to as minor currencies or crosses. These pairs have slightly wider spreads and are not as liquid as the majors, but they are sufficiently liquid markets nonetheless. The crosses that trade the most volume are among the currency pairs in which the individual currencies are also majors. Some examples of crosses include the EUR/GBP, GBP/JPY, and EUR/CHF.

Exotic currency pairs include currencies of emerging markets. These pairs are not as liquid, and the spreads are much wider. An example of an exotic currency pair is the USD/SGD (U.S. dollar/Singapore dollar).


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EUR/USD CURRENCY PAIR.

The EUR/USD distinguishes from other currency pairs on Forex by its high trading volumes. There is a reason for it. Firstly, the pair includes two of the most popular currencies in the world with the US dollar taking the lead and the euro going just right behind. Secondly, the pair consists of the currencies of the two largest and strongest economies in the world, namely the US and European ones. This is what makes the pair the most traded instrument in the forex market. Its intraday trading volume often reaches 29%.

The EUR/USD pair is a major currency pair as it is traded along with the US dollar. The euro is the base currency while the US dollar is the quoted one. The pair reflects how many dollars are needed to buy one euro. If the single currency begins to strengthen, a trader needs to pay more dollars to buy it. Alternatively, when the exchange rate of the euro decreases, this is a signal that the US currency will assert strength.

Like other forex trading instruments, the EUR/USD pair has a number of various features that should be taken into account when trading it.
The first feature is its high liquidity, which ensures profitable transactions. Indeed, both the greenback and the euro are considered the most traded currencies in the world. The time of active trading is the second major feature of the pair. Its trading volumes remain high around the clock regardless of the opening of a particular trading floor. Nevertheless, experienced traders stress that during the European and American sessions, the pair's trading volume increases even more. As for the third characteristic, the EUR/USD pair has low spreads. Perhaps, the low spread is one of the main advantages of this pair. Since its liquidity is more than high, spreads on this trading instrument are low. Quite often, they are less than 1 pip.

What is more, when it comes to volatility, this pair also differs from others. It is neither high nor low. It is something in-between. Naturally, in case of a market-moving event, the pair's trajectory shows wild jumps that may reach 100 pips or even more. However, history shows that usually, the pair fluctuates within 80 pips. Interestingly enough, the trajectory of the EUR/USD pair is easy to project. First of all, investors are well aware that sharp movements of the pair occur ahead of the release of important statistics in the US or Europe as well as reports of the main central banks on the state of the economy and its prospects. Such publications happen on a regular basis and they are announced in advance. Thus, it is much easier for analysts to make forecasts. Apart from that, technical tools also perfectly display the upcoming dynamics of the pair. There is a nuance though. The trajectory of the EUR/USD pair sometimes may differ from the analysis and forecasts. Luckily, it occurs quite rarely but still it needs to be reckoned with. The sixth feature includes a wide range of derivatives that can be applied to this pair. It allows traders to make transactions not only in the spot market but also on the binary options market, the futures market and so on. Despite the wide range of advantages, beginning market players or those who lack experience are recommended against trading this currency pair. Investors have to sharpen their skills to react quickly to important news and changes in the market sentiment. The best strategies for the EUR/USD pair are pipsing and scalping since the spread is minimal.



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USD/JPY CURRENCY PAIR

USD/JPY belongs to the category of major currency pairs, that is, to the most traded pairs on the forex market since it includes the US dollar. Accordingly, the greenback is the base currency in the pair while the Japanese yen is the quoted one. In other words, this means how many Japanese yens can one US dollar buy. USD/JPY is the second most popular currency pair among investors thanks to the pair’s trading volume in the Asia-Pacific region. According to preliminary estimates, it accounts for about 19% of the total financial market turnover. At the same time, the majority of trades are conducted by Asian traders. Nevertheless, the USD/JPY pair is also popular among European and American traders. They often trade USD/JPY because the currencies included in the pair belong to the world’s most powerful economies. Japan is practically the only country in the world that has had a budget surplus for a long time. Meanwhile, the United States is the largest country in terms of GDP that constitutes almost a quarter of the global economy. Market participants find USD/JPY to be an unpredictable and tricky pair which is resistant to thorough market analysis. However, with time, it becomes clear that it is not entirely true. Sharp exchange rate fluctuations are sometimes difficult to predict. In such a case, detailed technical and fundamental analysis is of great help as it can indicate the riskiest trading moments. This, on the one hand, can save investors from incurring serious losses and, on the other hand, help them generate huge profits. As any other currency pair, USD/JPY has a set of its own unique features. First of all, it is the pair’s reaction to global political and economic events. Many experts compare the pair to litmus paper because of its immediate reaction to certain processes in the global economy. The main problem is that it is impossible to predict the pair’s response to various reports. Moreover, USD/JPY can run contrary to the general trend. Perhaps this is why it is extremely hard to analyze the further movement of the pair, as all preliminary forecasts are rarely confirmed. Secondly, USD/JPY is a highly liquid pair. This allows traders to use the minimum value of the spread. Thirdly, USD/JPY trading hits its peak during the night trading hours in Europe. This is the moment of hectic trading as Asian exchanges open. The busiest trading hours are from 4 am till 12 pm GMT+3. Importantly, the beginning of the Asian session is the most favorable moment for trading. In this regard, many traders have to work with this currency pair only at night. Finally, as mentioned above, the USD/JPY pair responds well to technical and fundamental analysis. Therefore, on the one hand, the pair is easy to work with. On the other hand, investors are forced to analyze events in greater depth because brief analysis will not do in this case. The most effective strategy for the USD/JPY pair is the London Explosion. Its key feature is to catch the most suitable trading moments before the immediate opening of the London session.


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GBP/JPY CURRENCY PAIR


The GBP/JPY pair is one of the most popular trading instruments in the market. First of all, this is related to the fact that the pair includes the currencies of the two largest and strongest economies in the world. That is, the British pound and the Japanese yen. Literally, this means how many Japanese yens can 1 British pound buy. Therefore, the pound sterling becomes the base currency in this case, while the Japanese yen is the quoted one. The GBP/JPY pair has a number of important features which have made it extremely popular among traders. Firstly, it is the pair’s volatility. Perhaps GBP/JPY is one of the few currency pairs whose volatility reaches 7. Some days, the range of the GBP/JPY can be anywhere from 150-200 pips which is quite appealing to investors. For that reason, GBP/JPY is considered to be one of the most profitable currency pairs in the market. Secondly, GBP/JPY is a high-risk currency pair. Oftentimes, the exchange rate changes so quickly that traders simply have no time to react. For the same reason, novice traders and those who are not confident about their trading skills or not prepared to take risks are recommended against trading this currency pair. This is the case when the risk of losses increases multiple times. Moreover, even experienced traders cannot always predict its behavior. Due to its explosive nature, GBP/JPY was nicknamed the "royal couple" or the "dragon". The pair is characterized by aggressive trading signals, a wide range of price fluctuations, the boom-bust nature, and volatility. Thirdly, the pair is quite liquid. This is beneficial for the GBP/JPY pair itself and allows it to function perfectly with other instruments. The GBP/JPY pair is distinguished by significant trading volumes. The reason for that is that the currencies included in the pair belong to the largest trading floors in the world - the London and Tokyo stock exchanges. Dealing with the pound/yen pair, traders should be extra careful and resort to the help of technical and fundamental analysis. Nevertheless, the latter does not always guarantee good results as occasionally the pound sterling behaves contrary to global trends and news. The best strategies for this pair are the breakout strategy and the scalping strategy. However, they must be implemented very carefully. Another useful strategy is Swing Trading - that is, trading in a sideways trend. The British pound is highly dependent on internal factors and events taking place in Europe. In this regard, one should carefully assess general European news, and most importantly, fluctuations in the euro exchange rate. The yen, for the most part, is tied to the policy of the Bank of Japan, as well as to demand for goods produced in the country, in particular electronics. Do not forget that the BoJ rarely warns about interventions in the foreign exchange market. Therefore, it is better to always use a Stop Loss especially when you open short positions. Both the pound and the yen are freely convertible currencies included in the CLS list. In addition, both currencies are considered the key global reserve currency. The British pound is ranked third on this list after the US dollar and the euro. The Japanese yen comes right after them, taking fourth place. Just like the pound sterling rate, the yen rate is determined in the course of trading, depending on the level of supply and demand - that is, the currencies are classified as freely convertible.


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