Online Forex market is, as you know, the most active of all financial markets in the world. The daily turnover on Forex amounted to 5.1 trillion dollars in 2016 according to Triennial Central Bank Survey.
The most active players in this market, so-called market makers, are banks, corporations, and other large financial enterprises. All of them trade currencies among each other via online electronic networks. Small organizations and private investors occupy a far smaller part of the market.
What is a currency pair
Each transaction on the foreign exchange market is both a sale and a purchase. An exchange of two currencies takes place, in which:
- one side sells currency A for currency B (or buys B for A)
- the other side buys A for B (or sells B for A)
All these currencies are applied as a commodity on the market and at the same time, they express their value. The exchange rate is the value of the currency of one country, expressed in units of another country. The price of a monetary unit can be based on the ratio of supply and demand for a given currency. Also, the price of a national currency may be regulated by a decision of the government or its main financial body, usually the central bank. To explain the relationship between exchange rates, the concept of purchasing power parity is used. For its formulation, the law of one price is applied: the cost of the same product in different countries must be the same.
Since these prices are expressed in different currencies, the price ratio shows the current exchange rate of one currency for another. So, a currency pair is the price of one currency in relation to another.
For example, if the rate of the GBP/USD currency pair is 1.13576, then this means that the value of 1 GBP is 1.13576 USD.
It should be noted that currency pairs are also compiled according to the standard or, to put it more artistically, according to the historically established tradition. There is no USD/EUR currency pair, but there is EUR/USD currency pair.
As a result, the base currency is always in the first place, which expresses a unit of a good (in the example above, pound is a commodity). And the currency in second place is the quoted currency; it expresses the value of the first currency (US dollars is a unit of measurement of the pound value).
The most popular currency pairs
Pairs with the US dollar (USD) are the most popular ones in the online Forex market. They are also called majors. For example:
- EUR/USD — the Euro to the US dollar;
- USD/JPY — the US dollar to the Japanese yen;
- USD/CHF — the US dollar to the Swiss franc;
- GBP/USD — the British pound to the US dollar.
Its popularity is so high that, for example, in analytical reviews experts often do not write the whole name of a currency pair but mark only one of its parts. For example, an analytical review of EUR means an analytical review of the EUR/USD currency pair, and an analytical review of GBP means an analytical review of GBP/USD. Besides, JustForex posts analytics for four majors on a daily basis in Daily Forecast section.
There are also cross pairs or cross rates. These are currency pairs in which the US dollar is absent. As a rule, they are less active than majors. These are some of them:
- AUD/CAD — the Australian Dollar to the Canadian Dollar;
- EUR/GBP — the Euro to the British Pound;
- GBP/AUD — the British Pound to the Australian Dollar;
- NZD/JPY — the New Zealand Dollar to the Japanese Yen and much more.
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