#TradingPairs101

What is a currency pair?

A currency pair shows the value of one currency compared to another. The first currency is called the base currency, and the second is the quote currency. It tells you the amount of the quote currency needed to purchase one unit of the base currency. For example, a currency pair like EUR/USD shows the value of the euro compared to the US dollar. In this pair, the euro is the base currency, and the US dollars needed to buy one euro. Currencies are identified using three-letter codes: EUR for euro, USD for US dollar, CAD for Canadian dollar, and AUD for Australian dollar.

Understanding how currency pairs work?

Using the same example of the EUR/USD pair (Figure 1), let’s consider a scenario where the euro strengthens against the US dollar. This can happen, for example, when the European Central Bank (ECB) raises interest rates, which is one of the reasons that can increase the value of a currency.

Higher interest rates often attract more investors looking for better returns, increasing the demand for the euro and making it more valuable (appreciated) compared to the dollar.

What does liquidity mean?

Liquidity refers to how actively a currency pair is bought and sold in the market. The more people trading a currency pair and the higher the trading volumes, the more liquid it is.