Base Currency definition in FX trading

Base Currency definition in FX trading

Base currency and quoted currency are fundamental concepts of Foreign exchange markets. A Base currency refers to the first currency you read in a currency pair. In the EURUSD pair, the EUR is the base currency, and the USD is the quoted currency. Although the concept is straightforward, it is often overlooked, and many beginners have difficulty grasping its significance.

Let’s explain some basics about base currency to newbies to help them start their FX trading journey. 

Understanding Base Currency

Base currency is a cornerstone of Forex trading, and it gives traders much needed information about the currency pair. In our case of EURUSD the EUR which is the base currency is quoted against the dollar. So, what does the EURUSD with exchange rate of 1.1010 means? It means that, for every EUR, the trader needs to pay 1.1010 USD, or 1 EUR equals 1.1010 USD. This is a crucial concept in understanding Forex trading. 

How to Determine Base Currency in a Currency Pair

It is very easy to determine which one is a base currency in any currency pair. Base currency is always on the left side of the pair, while quoted currency is always on the right side. So, if you see any currency pair and its exchange rate, know that the exchange rate is the price you will need to pay in the quoted currency to buy one unit of the base currency. 

  • EURUSD = 1.1010 – 1 EUR equals to $1.1010
  • GBPUSD = 1.2304 – 1 GBP equals $1.2304
  • USDJPY = 147.55 – 1 USD equals 147.55 yen

This list will help beginners understand what's going on in Forex markets. 

Base Currency vs. Quote Currency

So, when the USD is strong, the EURUSD moves downward, meaning for every EUR there are fewer and fewer dollars needed to purchase. The opposite is true when USD is weaker than other currencies. 

This is a very confusing concept for beginners and may lead to them

Why Base Currency Matters – Must-know concepts

Here are basic sentences you will hear in the Forex trading world and their meaning.

  • EURUSD is appreciating or gaining momentum: It means EUR is becoming stronger as the pair price goes up. For every EUR, traders need to pay more USD.
  • The Japanese yen is falling - USDJPY goes upward, for every USD more and more JPY is needed. USD is the base currency in this case. 
  • The dollar is tanking – the dollar is falling against other currencies. For USD-quoted pairs, this means pairs are rising, while for pairs like USDJPY, the pair is falling. 

Now, it should be easier for beginners to understand the terms and slang of Forex trading. 

Common Base Currencies

Before we list the most common base currencies, let’s list the major currency pairs. Major pairs are the most traded currency pairs on FX markets. The major pairs are

EUR/USD – Euro against the dollar (EUR is the base currency)

USD/JPY – the dollar against the Japanese yen (USD is the base currency)

GBP/USD – Great Britain pounds against the dollar (GBP is the base currency) 

USD/CHF – dollar against the Swiss Franc (USD is the base currency)

As we can see, the dollar or USD, pound or GBP, and Euro or EUR are the most popular base currencies in the FX world.