Do you know what a currency pair is? Are you familiar with its components as well as what each component signifies? If you aren’t and would like to be familiar and knowledgeable about currency pairs, then this is absolutely the place you want to be. Because on this web page, I will explain what a currency pair is, why it is important to currency traders, what the components are, as well as details regarding currency quotes and more.
I myself look at currency pairs all the time. Even as I write this article, I am switching back and forth between computer screens to monitor the price action of one of my favorite currency pairs, the European euro/United States dollar. But before I start getting ahead of myself, let’s start from the beginning.
What is a Currency Pair?
A currency pair are two currencies set together to illustrate currency valuation relative to one another in the Foreign Exchange Market. Currency pairs along with currency quotes are important to currency traders because it lets them quickly learn what the trading price and valuation is between two currencies.
Ok, consider this example. Let’s say you wanted to know the value of the European euro relative to the United States dollar. To illustrate the currency valuation of the European euro relative to the United States dollar, the currency pair would be shown as: European euro/United States dollar.
Please note that is the long form of displaying a currency pair. It is very common to use the International Organization for Standardization (ISO) currency codes when showing currency pairs. So instead of showing the currency pair like this: European euro/United States dollar, one would simply show eur/usd.
The Break Down
Let’s break down the eur/usd currency pair. The first component of the currency pair, ‘eur’, is the ISO code for the European euro. Because the euro is before the forward slash (/), it is known as the ‘base currency’. The base currency is any currency in a currency pair that is before the forward slash (/).
The forward slash, which is the second component of a currency pair, is the divider used to separate the two currencies. Please note that some individuals and organizations don’t include a forward slash when illustrating a currency pair. Some may show currency pairs like: eurusd or eur-usd. However, most of the time, a currency pair is displayed with a forward slash. The third component of a currency pair is the currency after the forward slash, which is known as the quote currency. In this case, the ‘usd’, which is the ISO code for the United States dollar would be quote currency.
So we have the base currency, which is the eur, the forward slash, which is the separator, and the quote currency, which is the usd. Those are all the components of a currency pair. But now what?
Currency value or price is usually compared to another currency. Currency quotes, also known as Forex quotes, Forex trading prices, currency trading prices and more, are the prices that currencies are trading at. So in the eur/usd example, if I stated that the currency quote for the eur/usd is $1.2487, that means it would take $1.2487 United States dollars to purchase €1 European euro. The currency quote applies to the quote currency, which is the United States dollar. Get it? Oh, and because it takes more United States dollars to buy €1 European euro, that means that the Currency Market deems the euro to be more stronger or more valuable than the dollar.
Here are some more examples. If the Australian dollar/United States dollar (ISO codes: aud/usd) has a currency quote of $0.6857, what would that mean? That would mean it would take $0.6857 United States dollars to buy $1 Australian dollar. The Currency Markets deem the United States dollar to be more valuable than the Australian dollar. I hope you get it. I want to move on because I have gotten off the subject of currency pairs and moved to the subject of currency quotes. So let’s move on.
Just Mix It Up
Now that you have a firm understanding of what currency pairs are, I want to leave you with this final thought. Currency pairs can be ordered and mixed up in any way. Remember the eur/usd. Why did I put the euro as the base currency and the dollar as the quote currency? Is there a rule to do so? No. I did it because I have seen most professionals put the euro as the base currency and the dollar as the quote currency 9 times out of 10.
But that doesn’t mean it is incorrect to put the dollar as the base currency and the euro as the quote. You can arrange currency pairs any way you see fit. Just make sure the currency quote is properly adjusted. Let’s go back the the eur/usd example from earlier. Remember the example quote of $1.2487 I gave the eur/usd? If I decided to rearrange the eur/usd currency pair from eur/usd to usd/eur, I can no longer use the currency quote of $1.2487 because it would no longer be correct.
Why? Because the currency quote would be saying that it would take €1.2487 euros to buy $1 dollar, which would be incorrect. If the currency pair is rearranged, then the currency quote would have to be adjusted. The adjusted currency quote for the currency pair usd/eur would be €0.7513.