Currencies: pairs, pips and why EUR/USD moves
The foreign exchange market, usually called forex or FX, is where currencies are traded against each other. Companies use it to pay foreign suppliers, investors use it to buy assets abroad, and traders use it to speculate on exchange rates. This lesson explains how currency prices are quoted and what moves them.
Currencies trade in pairs
A currency has no price on its own; it only has a price in terms of another currency. So currencies are always quoted in pairs, such as EUR/USD (euro against US dollar) or USD/JPY (US dollar against Japanese yen).
The first currency is the base currency and the second is the quote currency. The price tells you how many units of the quote currency one unit of the base currency costs. Suppose EUR/USD is quoted at 1.0850. That means one euro costs 1.0850 US dollars.
Buying EUR/USD means buying euros and selling dollars at the same time. If the price rises to 1.0900, the euro has strengthened against the dollar (or the dollar has weakened against the euro, which is the same thing) and the buyer has gained.
Pips
A pip is the standard unit for small price changes in a currency pair. For most pairs it is the fourth decimal place, 0.0001. For pairs quoted in Japanese yen it is the second decimal place, 0.01, because yen prices are larger numbers. Many brokers show one extra decimal, a fraction of a pip sometimes called a pipette.
A move in EUR/USD from 1.0850 to 1.0875 is 25 pips.
How much a pip is worth depends on how much currency you trade. Currency trades are often sized in lots:
- A standard lot is 100,000 units of the base currency.
- A mini lot is 10,000 units.
- A micro lot is 1,000 units.
For any pair where the US dollar is the quote currency, such as EUR/USD, one pip on a standard lot is worth exactly $10 (100,000 × 0.0001). On a mini lot it is $1, and on a micro lot $0.10. So the 25-pip move above would be worth $250 on one standard lot. For pairs quoted in other currencies the pip value is fixed in that currency, and its dollar value changes with the exchange rate.
Where and when currencies trade
Most currency trading is over the counter: between banks, dealers, funds and brokers, not on one central exchange. Because it passes between financial centres as the day moves around the world, the market runs around the clock on weekdays, conventionally from about 5 p.m. ET on Sunday to 5 p.m. ET on Friday. Activity is usually highest when two major centres overlap, such as the hours when both London and New York are open.
Because there is no single exchange, the price you see depends on your broker, and spreads differ between brokers. Currency futures, which trade on exchanges such as CME, are another way to trade the same exchange rates.
What moves EUR/USD
EUR/USD is the most heavily traded currency pair. Its price reflects the relative attractiveness of holding euros versus dollars. The main forces:
- Interest-rate expectations. As Lesson 3 explained, money tends to flow toward higher returns. If markets start to expect the Federal Reserve to keep rates higher than the European Central Bank, the dollar tends to gain against the euro, and the reverse is also true. What matters most is the change in expectations, not the current rate.
- Economic data. Releases such as US employment figures, inflation reports and euro-area growth numbers change those expectations. That's why currencies can move sharply in the minutes after a scheduled release.
- Central bank communication. Rate decisions, press conferences and speeches can shift expectations even when rates don't change.
- Risk appetite. In times of stress, investors often move toward assets they see as safe, which has frequently included the US dollar.
- Trade and investment flows. Companies converting overseas earnings and investors buying foreign assets all create currency demand.
None of these work like a switch. Markets react to news relative to what was already expected, so a "strong" data release can still weaken a currency if traders were expecting even stronger.
Costs and leverage
Besides the spread, holding a currency position overnight with many brokers involves a small daily credit or charge called rollover or swap, which reflects the interest-rate difference between the two currencies. Currency trading with brokers is usually done on margin, meaning you put up only a fraction of the position's value. That makes it easy to control a large position with a small account, which amplifies both gains and losses. Lesson 8 covers why that matters. Limits on leverage for retail clients vary by country and regulator.
Where to see currencies on PYE Markets
The Markets page includes major currency pairs, and the Positioning page shows how different groups of traders are positioned in currency futures, from the CFTC's weekly Commitments of Traders report.
Key terms
- Currency pair
- Two currencies quoted against each other, such as EUR/USD.
- Base currency
- The first currency in a pair; the price says how much of the second currency one unit costs.
- Pip
- 0.0001 for most pairs, 0.01 for pairs quoted in yen.
- Lot
- A standard trade size: 100,000 units (standard), 10,000 (mini) or 1,000 (micro).
- Rollover (swap)
- The daily credit or charge for holding a currency position overnight.
Next lesson: Lesson 5: Futures: contracts, margin and tick values
General education, not investment advice.