Unlike most other financial markets, foreign currency exchange market is a place where you trade pairs of assets, specifically foreign currency. The market moves as the parity between two currencies change. In other words, when you buy one currency, you do so by selling another. Base currency is listed first in a pair, while quote currency is the second listed. Major currencies group consists of those currencies that are most often traded. Currency tied to commodities are also another distinct group, while currency pairs not including American dollar are called cross currencies.
- Currencies are always traded in pairs because when you buy or sell one currency, you automatically sell or buy another.
- The exchange rate of EUR/USD is determined by a number of factors, not least of which are the interest rates set by the European Central Bank (ECB) and the US Federal Reserve (Fed).
- Like with most other currency pairs, the strength of GBP/USD comes from the respective strength of the British and American economies.
“The price displayed for a currency pair represents the amount of the quote currency you will need to spend in order to purchase one unit of the base currency.”