Forex Academy
Chapter 2: Currency Basics

Understanding Forex Currency Pairs

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Base Currency vs. Quote Currency

  1. Base Currency: The first currency in a pair.

    • Example: In EUR/USD, the base currency is EUR (Euro).

  2. Quote Currency: The second currency in a pair.

    • Example: In EUR/USD, the quote currency is USD (U.S. Dollar).

    • If EUR/USD = 1.10, it means 1 EUR = 1.10 USD.

Types of Currency Pairs

1. Major Currency Pairs

Major pairs always include the U.S. dollar (USD) and are the most heavily traded in the forex market. These pairs offer high liquidity, tighter spreads, and lower trading costs compared to other pairs.

There are seven major currency pairs:

  • EUR/USD (Euro / U.S. Dollar) – The most traded forex pair globally.

  • GBP/USD (British Pound / U.S. Dollar) – Known as "Cable," highly liquid.

  • USD/JPY (U.S. Dollar / Japanese Yen) – The second most traded pair, influenced by Asian markets.

  • USD/CHF (U.S. Dollar / Swiss Franc) – A safe-haven pair, often moves inversely to risk sentiment.

  • AUD/USD (Australian Dollar / U.S. Dollar) – Strongly tied to commodity prices, especially metals.

  • USD/CAD (U.S. Dollar / Canadian Dollar) – Highly influenced by oil prices.

  • NZD/USD (New Zealand Dollar / U.S. Dollar) – A commodity driven currency often impacted by dairy and agricultural exports.

These pairs are the backbone of the forex market, offering the highest trading volumes and efficiency.

2. Minor Currency Pairs (Cross Pairs)

Minor pairs, also known as cross pairs, do not include the U.S. dollar (USD) but involve other major currencies. These pairs have slightly wider spreads than major pairs but are still actively traded.

Examples:

  • EUR/GBP (Euro / British Pound)

  • EUR/JPY (Euro / Japanese Yen)

  • GBP/JPY (British Pound / Japanese Yen)

3. Exotic Currency Pairs

Exotic pairs consist of one major currency and one currency from an emerging or smaller economy. These pairs have lower liquidity, wider spreads, and higher volatility, making them riskier for trading.

Examples:

  • USD/TRY (U.S. Dollar / Turkish Lira)

  • EUR/ZAR (Euro / South African Rand)

  • GBP/MXN (British Pound / Mexican Peso)

Key Takeaways

  • The base currency is always the first currency in the pair.

  • The quote currency tells you how much of it is needed to buy one unit of the base currency.

  • Major pairs are the most liquid and widely traded, minor pairs exclude USD but include other major currencies, and exotic pairs involve currencies from smaller or emerging economies with higher volatility.