In forex trading, each currency pair represents the current exchange rate between two currencies. Let’s take EUR/USD (euro-to-dollar exchange rate) as an example to explain how to interpret this information:
- The currency on the left (euro) is the base currency.
- The currency on the right (U.S. dollar) is the quote currency.
- The exchange rate indicates how much of the quote currency is required to buy 1 unit of the base currency. Therefore, the base currency is always expressed as 1 unit, while the quote currency fluctuates based on the market’s current conditions and the amount needed to purchase 1 unit of the base currency.
- If the EUR/USD exchange rate is 1.2, it means that €1 will buy $1.20 (alternatively, it will cost $1.20 to buy €1).
- When the exchange rate increases, it signifies that the base currency has strengthened in value compared to the quote currency (as €1 will buy more U.S. dollars). Conversely, if the exchange rate decreases, it indicates a decline in the value of the base currency.
- It’s worth noting that currency pairs are typically presented with the base currency listed first and the quote currency second. However, there are historical conventions for specific currency pairs. For instance, conversions from USD to EUR are denoted as EUR/USD, not USD/EUR.