What is a Currency Pair?

A currency pair is the quotation of the value of two currencies traded in the forex market against each other. It shows the amount of one currency (base currency) required to buy a unit of another currency (quote currency). 

A three-letter symbol is often associated with each currency for easy recognition. For example, the Australian dollar in international markets is seen as “AUD.” Keep reading to understand how a currency pair works. 

What Are The Components of a Currency Pair? 

Currency pairs represent the value of two different currencies against each other. At WR Trading, we’ve analyzed the two components of currency pair and they are: 

Base Currency

The base currency is the first currency that appears in a currency pair in the forex market. Most traders analyze the base currency to determine the value of a currency pair and profits and losses in trading. 

For this currency pair, a trader can open a buy position if they predict the value of the base currency will increase. But, where the trader expects the value of the base currency to reduce, they could open a sell position instead. 

In the forex market, the base currency is often known as the domestic currency because it tends to increase in value relative to the quoted currency. Traders also use the currency pair to understand how much of the quote currency they need to purchase one unit of the base currency. So, the price of the base currency is often calculated in units of the quoted currency.  

Quote Currency

The quote currency is the second currency in a currency pair used to determine the value of the base currency. It determines the price at which a trader can buy or sell a particular currency pair. In a forex chart, prices listed for currency pairs are always in the quoted currency price. 

When traders predict the downward movement of the price of a quoted currency, they can open a buy position as opposed to the base currency. However, if the trader predicts the price of the quoted currency will increase, they could open a selling position. 

Which Types of Currency Pairs Exist?

The following are some of the types of currency pairs:

Major

The major currency pairs are among the most commonly traded in the forex market. It includes currencies from the world’s biggest and most stable economies. They often have small tight spreads and high liquidity, which are large buy and sell orders. The tight spreads mean a small difference in the ask and bid price, making it popular among traders. 

Here is a list of common major currency pairs:

• EUR/USD
• GBP/USD
• USD/JPY
• USD/CHF
• AUD/USD
• USD/CAD
• NZD/USD

Minor

Minor currency pairs, popularly referred to as cross currency pairs, differ from the major currency pairs as they do not include the USD. The minor currency pairs are either made up of a major currency and an emerging economy or two major currencies. 

Traders prefer this currency pair because it allows for alternatives that do not involve the USD. It allows diversification of trading strategies, which traders can use to take advantage of several economic developments. 

Here is a list of common minor currency pairs:

• AUD/NZD
• EUR/AUD
• EUR/GBP
• GBP/JPY
• EUR/CHF
• AUD/JPY
• GBP/CAD
• NZD/JPY
• AUD/NZD

Exotic

Exotic currency pairs feature only one major currency and one currency from a smaller economy. It is the least commonly traded currency pair because political and economic developments actively influence it in both countries. They also have wider spreads and lower liquidity than major and cross pairs. 

Here is a list of common exotic currency pairs:

• USD/THB
• USD/HUF
• EUR/MXN
• GBP/BRL
• USD/TRY
• USD/CZK
• USD/RUB
• AUD/MXD
• AUD/SGD

Which Factors Are Influencing The Exchange Rate of Currency Pairs?

Several factors influence the exchange rate of currency pairs, and they include:

• Interest Rates: Foreign investors are drawn towards countries with higher interest rates because they offer greater returns on their investments. The influx of capital into the country increases demand for its currency, thereby increasing its value, which is why traders monitor the central bank’s interest rate decisions for trading opportunities.

• Political Stability: One of the major factors that can affect a currency price is geopolitical volatility. It leads to capital flight, which causes the country’s local currency to depreciate. A country with political stability is bound to have an increase in investors because it gives them a sense of security about the market.

• Inflation: Inflation is another factor that influences the exchange rate of currency pairs. An economy with a significantly low inflation rate often shows a rise in currency value. This is because its purchasing power will increase relative to other currencies. High inflation reduces the value of a currency, making it less attractive to investors.

• Terms of Trade: An economy with higher interest rates and favorable terms of trade will attract foreign investors looking for better returns on their capital. The increase in foreign capital and improved trade conditions will boost economic activity, thereby driving the value of the local currency higher. 

Where Can You Trade Currency Pairs?

You can trade currency pairs on many online trading platforms provided by Forex brokers. At WR Trading, we’ve listed some of the top platforms where you can start trading currency pairs: 

FP Markets

FP Markets is one of the top trading platforms with competitive spreads. They offer a range of currency pairs like major, minor, and exotic pairs. The platform also provides traders access to MetaTrader 4 (MT4), MetaTrader 5 (MT5), cTrader, TradingView, WebTrader, MT5 Mobile Trader, and Mobile Trading App, which makes it one of the best choices for beginners. 

There are two account types available on this platform (Standard and Raw), each of which is tailored to suit the diverse needs of traders. FP Markets also have trading tools on the platform, like TradeMedic, VPS, Traders Toolbox, Forex Calculator, MAM/PAMM, Autochartist, and Trading Central. 

Vantage Markets

At WR Trading, we also reviewed the Vantage platform and saw that it is a great option for trading currency pairs. The platform is popular among traders for its low spreads and fast trade execution. It has a user-friendly interface and supports MetaTrader platforms. Advanced charting tools and automated trading features are also available on the platform.   

Vantage also gives traders access to several currency pairs, making it easy to diversify portfolios. At Vantage markets, traders can enjoy flexible account options tailored to suit different trading strategies. 

RoboForex

RoboForex is also a trading platform that caters to the diverse needs of traders by offering numerous currency pairs. It has competitive spreads (0.0 pips) and low commission fees, making it an attractive option for long-term investors and consistent traders. 

The platform gives traders access to MT4, MT5, and R Stocks Trader, which makes it a suitable choice for beginners and seasoned traders. There are also educational resources available that traders can use to practice and enhance trading skills. 

Conclusion

Currency pairs in Forex Trading are quotations of two currencies representing the exchange rate between those countries. Interest rates, political stability, inflation, and terms of trade can influence the exchange rate of currency pairs. The three types of currency pairs, major, minor, and exotic pairs, offer different trading opportunities. 

Frequently Asked Questions on Currency Pairs