Thus, the selling price of the currency pair is the amount one will receive in the quote currency for providing one unit of the base currency. A currency pair is a quotation of two different currencies, where one is quoted against the other. The first listed currency within a currency pair is called the base, while the second currency that is the benchmark is called the quote. The quote currency (also known as counter currency) is the second one in a currency pair. For accounting purposes, a firm may use the base currency and quote currency base currency as the domestic currency or accounting currency to represent all profits and losses. For example, you might see USD/GBP (United States dollars to British pounds).
- The value of the pair shows how much of the quote currency you need to buy one unit of the base currency.
- In this case, the euro (EUR) is the base currency, and the U.S. dollar (USD) is the quote currency.
- Investors can determine how much of the quote currency they need to sell to purchase one unit of the first or base currency.
- The relationship between the base currency and the quote currency is fundamental to understanding currency pairs in forex trading.
- The major currency pairs tend to have the most liquid markets and trade 24 hours a day Monday through Thursday.
The markets are moving.
When looking at a forex chart, the price listed for any forex currency pair will always be the quoted currency price. The quote currency is essential for traders as it determines the price at which they can buy or sell a specific currency pair. The base currency plays an instrumental role in establishing the exchange rate value of a currency pair while helping traders analyse the market to potentially execute trades successfully. Traders use the currency pair to determine how much of the quote currency is needed for them to purchase one unit of the base currency.
The base currency in forex refers to the first currency listed in a currency pair. It is the currency against which all other currencies in the pair are measured. The base currency in forex is the first currency listed in a currency pair and acts as the reference point for determining the value of the second currency. The risks of loss from investing in CFDs can be substantial and the value of your investments may fluctuate.
Understanding Currency Pairs
Conversely, if the base currency depreciates, the trader incurs a loss. However, for an American trader, a EUR/USD quote is an indirect one. So, for example, a quote of 0.80 EUR/USD means that 1 EUR would cost you $0.80. If the pair appreciates to 1.00, the euro has increased in value because it now costs $1 to buy a euro. On the other hand, if the pair is quoted .75, the dollar is seeing strength because it now costs just $0.75 to buy a euro.
Euro vs. Dollar
Quote currency, on the other hand, can be more stable, since it is often pegged to a major currency like the US dollar. If you open a long position, you would do so in the expectation that the base currency will rise, or that the quote currency will fall. So, if you thought that the US dollar was going to fall in value, or that the euro was going to rise, you would buy EUR/USD. The second part of the currency quotation is called the quote currency or the counter currency.
Global economic conditions, including economic growth, trade balances and financial stability, can affect the value of a quote currency. Economic turmoil in a country can lead to the depreciation of its currency, while robust economic performance can result in appreciation. We want to clarify that IG International does not have an official Line account at this time. We have not established any official presence on Line messaging platform. Therefore, any accounts claiming to represent IG International on Line are unauthorized and should be considered as fake.
Currencies constituting a currency pair are sometimes separated with a slash character. The slash may be omitted or replaced by a period, a dash, or nothing at all. Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result.
Index CFDs
Some traders only use base currencies from countries with stable economies to ensure a smoother trading experience. The euro currency originated because of the Maastricht Treaty in 1992 and was introduced as an accounting currency in 1999. The euro began circulating in countries of the European Union on Jan. 2002 and, over the years, replaced the currencies of most member nations. The euro has become the second most active currency in the world behind the U.S. dollar and the EUR/USD pair sees the most trading in the world of currency pairs trading. EUR/USD currency pair represents the euro versus the U.S. dollar and is different than most others because the dollar is the denominator or quote currency.
The quote currency also plays a significant role in determining profits and losses because forex trading involves speculating on the future direction of the exchange rate of currency pairs. When a trader buys a forex pair or goes long that pair, they are simultaneously buying the base currency and selling an equivalent value of the quote currency. This is why the transaction is called an exchange and takes place at a quoted rate of exchange or exchange rate.