Wednesday, February 27, 2013

What are Forex Pairs?

Forex pairs put one currency, for example the EUR, against another currency, for example the U.S. Dollar, and then forms the EURUSD forex pair or currency pair. The first currency is referred to as the base currency while the second currency is referred to as the quote currency. The price of the currency pair illustrates how much of the quote currency is required in order to purchase one unit of the base currency.

Positive economic as well as monetary news out of the base currency and negative economic as well as monetary news out of the quote currency will drive the exchange rate higher. On the same note, negative economic as well monetary news out of the base currency and positive economic as well as monetary news out of the quote currency will drive the exchange rate lower.

Here is an example:

Let’s assume the EURUSD is currently quoted at 1.3525. This means it takes $1.3525 in order to purchase €1. Therefore, if we receive positive news out of the Eurozone the Euro will grow stronger and the EURUSD pair will increase in value as it will cost more U.S. Dollars in order to purchase Euros. The same holds true for negative news out of the U.S. which would push the EURUSD exchange rate higher as it will make the U.S. Dollar weaker.

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