What a currency pair is

Every other market on this site quotes one thing in terms of money. A share quote is a number of dollars for a share. A gold quote is a number of dollars for an ounce. A currency quote has money on both sides, because the thing being priced is money, and that single difference is what changes how the number has to be read.

The number is a rate, not a price 

A pair is written as two three letter codes with a slash between them, and the order is load bearing. The currency written first is the base currency. The currency written second is the quote currency, also called the counter or terms currency. The number beside the pair states how many units of the quote currency it takes to buy one single unit of the base. A EUR/USD quotation therefore answers exactly one question, which is what one euro costs in US dollars, and it answers nothing else.

The order fixes which side of the ratio is held constant. The base is always one unit. It never varies and it never scales. Everything that moves lives on the other side of the slash. When a EUR/USD quotation rises, the euro has not become a larger thing; the number of dollars required to buy one of them has gone up. When it falls, that number has gone down. Nothing else has happened.

Which currency takes the base slot is decided by market convention, and the convention is historical rather than logical. A rough order of seniority runs euro, sterling, Australian dollar, New Zealand dollar, US dollar, Canadian dollar, Swiss franc, Japanese yen, and the more senior of the two takes the base slot. Sterling outranks the US dollar, so the pair is written GBP/USD, while the dollar outranks the yen, so the pair is written USD/JPY. The order is worth recognising rather than memorising, since a platform writes each pair the conventional way whichever way a reader would have written it.

Every position is two positions 

Because a rate is a relationship between two currencies rather than the value of one asset, a position in a currency pair is never a position in a single thing. A long EUR/USD position is at the same moment a long position in the euro and a short position in the US dollar. Those are not two trades that happen to be placed together. They are one trade described from both ends, because a currency can only be priced against another currency, and here the other currency is the dollar.

Long and short mean in foreign exchange precisely what the previous lesson set out. What the pair adds is the referent. A long EUR/USD position settles in its holder's favour when the euro rises against the dollar, and it is indifferent to how that came about. The euro may have strengthened against everything. The dollar may have weakened against everything. Both may have moved a little in opposite directions. The rate records the relationship between the two and records nothing about which side supplied the movement.

The mirror holds exactly. A short EUR/USD position is short the euro and long the dollar. In a contract for difference nothing has to be borrowed to make that possible, because the contract settles the difference in the rate and no currency changes hands at any point on either side.

Reading which currency is strengthening 

One rule covers every pair without exception. A rising rate means the base currency has strengthened relative to the quote currency. A falling rate means the base has weakened relative to the quote. There is no pair for which this is reversed, and the apparent exceptions people report are almost always a pair whose base currency is not the one they assumed. USD/JPY rising means the dollar strengthening against the yen, because the dollar is the base there, while EUR/USD rising means the dollar weakening against the euro, because the dollar is the quote there. The same currency, moving the same way, shows up as a rise in one chart and a fall in the other.

Commentary compresses all of this into phrases like the euro is up or the dollar is down. The quotation makes no such claim; it is a two sided statement, and the shorthand has picked a side for narrative convenience. Whether one currency is moving on its own account rather than against one counterpart is answered by comparing it across several of its pairs, or by a trade weighted index that measures it against a basket. Both describe movement already recorded, and neither carries information about movement that has not happened.

Majors, minors and crosses 

Practitioners sort pairs into three loose families. The groupings are market conventions rather than legal classifications, and the boundaries genuinely differ between institutions, which is why the same pair can appear under two labels on two platforms.

• Majors are the pairs carrying the US dollar on one side and one of a small group of heavily traded currencies on the other, conventionally the euro, the yen, sterling and the Swiss franc, usually with the Canadian, Australian and New Zealand dollars added. Desks disagree about that second group: some separate them as commodity currencies, on the ground that their economies are resource led, and some draw no distinction at all.
• A cross is any pair with no US dollar in it, such as EUR/GBP or EUR/JPY. The name is a fossil. Before direct quoting between two non dollar currencies was routine, a euro to yen rate was constructed by crossing two dollar rates, and pricing for the thinner crosses is still assembled that way behind the quotation even where the pair now trades directly.
• Minor is the least standardised of the three words. Some houses apply it to any cross between two major currencies. Others reserve it for pairs involving smaller or less liquid economies, which a third group calls exotics instead. It appears in instrument lists and filters, so it is worth recognising and worth holding loosely.

The shape of a quotation 

Most pairs are quoted to four decimal places, with a fifth digit rendered smaller or in a column of its own. Pairs carrying the Japanese yen as the quote currency are conventionally quoted to two decimal places with a third fractional digit, for the plain reason that a yen is worth far less than a euro or a dollar, so a fourth decimal would be precision without meaning.

A pip is the standard increment of that convention: the fourth decimal place in a four decimal pair, the second decimal place in a yen pair. The extra fractional digit beyond it is a tenth of a pip, called a point in platform terminology and a pipette in common speech. The distinction matters for reading rather than for deciding. Two charts showing what looks like the same movement are not showing the same number of pips if one of them is a yen pair, and every distance, cost and position size in later modules is expressed in pips rather than in decimals.

A quotation also has two sides, a rate at which the pair can be sold and a rate at which it can be bought, so a single number printed beside a pair is a simplification of a two sided quote. What the two sides are and what sits between them is the subject of the costs module.

When a pair actually trades 

Foreign exchange has no central exchange. It is an over the counter market, a network of banks, brokers and other institutions quoting to one another continuously, which is why the same pair can carry marginally different rates in different places at the same instant. The practical consequence is that the market runs without an opening bell: trading begins with the Asian session on Sunday evening and continues until the New York close on Friday, because as one region's business day ends another region's begins.

Activity is not spread evenly through those hours. It concentrates in a pair when the economies behind its two currencies are awake, and commentary conventionally describes the overlap of the London and New York hours as the busiest window for euro and dollar pairs. That describes typical activity and nothing more. Activity is not direction, quieter hours are not empty, busier hours are not orderly, and the sessions module deals with what the differences actually consist of.

Where the per-pair detail lives 

Everything above is convention, and convention is common to the whole market. The tradeable detail is not: contract size, quoting precision and the schedule are set per instrument. YAL lists 60+ FX pairs across the three families, and the specification of each one sits on the forex market pages, with the schedule on the answer on trading hours.