Currency Pairs and Relative Pricing
Currency pairs and relative pricing go together: a currency has no price of its own, only a price in another currency, so every pair you trade is a contest between two economies. A pair does not go up or down the way a stock does; the gap between two countries moves it.
A pair is a ratio
Ask whether the dollar is going up and the honest answer is “against what?”. EUR/USD at 1.10 reads like any price tag: one euro, the base currency, costs 1.10 US dollars, the quote currency. Buying the pair buys euros and sells dollars in the same instant. Which currency your profit is counted in is in What Is Base and Quote Currency?
Two stories in every move
Because the price is a ratio, a move in EUR/USD can come from either side of the slash:
- The euro strengthens, on good eurozone data or a more hawkish ECB. It takes more dollars to buy one euro, and EUR/USD rises.
- The dollar weakens, on soft US data or a more dovish Fed. Each dollar buys fewer euros, and EUR/USD rises with nothing happening in Europe at all.
- Both at once, which can produce the larger moves.
If you watch only one economy, half the picture is missing.
Strong against one, weak against another
A currency can be strong and weak at the same time, against different partners. The dollar can fall against the euro and rise against the yen in the same hour, because EUR/USD and USD/JPY are two separate contests. To judge whether a currency is broadly strong, look at it across several pairs, or at a trade-weighted index that blends them. The dollar’s pairs side by side are on Major forex pairs: prices and fundamentals.
Compare both sides, not one
Once every pair is relative, the question changes. You are not forecasting “the euro”. You are judging which of two economies has the stronger case now.
That is why a good view on the euro can still lose money: if the US story is better, money can flow toward the dollar and EUR/USD can fall. A common approach is to pair a currency with stronger fundamentals against one with weaker fundamentals, so both legs point the same way. Each pair page puts both currencies’ rates, inflation, growth, unemployment and positioning side by side, as on EUR/USD fundamentals.
Crosses: the same idea without the dollar
A pair without the US dollar, such as EUR/GBP or AUD/JPY, is called a cross. Because most currencies are quoted against the dollar, a cross can be worked out from two dollar pairs: EUR/GBP is EUR/USD divided by GBP/USD. With EUR/USD at 1.10 and GBP/USD at 1.30, EUR/GBP is about 0.846.
If the euro and the pound move the same way against the dollar, EUR/GBP barely moves. The dollar cancels out, and what is left is the euro against the pound.
Why every release is relative
A hot US inflation report tends to support the dollar, but EUR/USD falls only if the report widens the expected gap between the Fed’s and the ECB’s paths. If the ECB is expected to move just as hawkishly, the pair can sit still. The rate side of that comparison is in Anatomy of a Rate Differential; the gap for every major pair today is on Interest rate differential by currency pair, and after inflation on Real interest rates by currency.
Before you take a view on a pair, write down the case for both sides. If your view mentions only one currency, you have done half the work.