Forex Explained / Forex Foundations

Read the base currency, quote currency and direction of an exchange rate before interpreting any price movement.

The first currency is the base

In EUR/USD, EUR is the base currency and USD is the quote currency. A hypothetical price of 1.1000 means one euro costs 1.1000 dollars. Buying this pair generally means buying euros and selling dollars. Selling it reverses those exposures.

If EUR/USD rises to 1.1200, each euro buys more dollars. The euro has appreciated against the dollar. In USD/JPY, however, a rising number means the dollar buys more yen. A rising chart does not always mean that the currency mentioned in a news headline is strengthening.

Write the units beside the number

A useful habit is to rewrite EUR/USD as dollars per euro. Multiplying 2,000 euros by 1.10 dollars per euro gives 2,200 dollars, with the euro units cancelling. Converting 2,200 dollars back into euros requires division by 1.10.

The reciprocal of 1.10 is approximately 0.9091 euros per dollar. Reversing a quotation therefore changes the number and reverses the direction of a movement. It does not create a second independent market view.

Percentage changes are not symmetric

A move from 1.10 to 1.12 is a euro appreciation of approximately 1.82 percent against the dollar. Calculate the new rate divided by the old rate, minus one, then multiply by 100. The reciprocal quotation falls by approximately 1.79 percent, rather than exactly 1.82 percent.

The difference comes from the denominator used in each calculation. This matters when comparing performance tables that quote some currencies against the dollar and others as dollars per currency.

A cross rate connects two quotations

Assume EUR/USD is 1.10 dollars per euro and USD/JPY is 150 yen per dollar. Multiplying them gives a hypothetical EUR/JPY rate of 165 yen per euro. The dollar units cancel. Actual executable prices can differ because each trade has a bid, ask, size and timestamp.

Before comparing a spot quote with a futures contract, check its specification. Some currency futures use a quotation direction that differs from the familiar spot pair. Matching the currency name alone is insufficient.

Check your understanding

At GBP/USD of 1.25, how many dollars correspond to 800 pounds before costs? If the quote rises to 1.30, which currency strengthened?

See the answer

800 multiplied by 1.25 equals 1,000 dollars. A rise to 1.30 means each pound buys more dollars, so the pound strengthened against the dollar.

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For education and research. Examples are hypothetical unless identified otherwise. This lesson does not provide personalised investment advice.