What Is Base and Quote Currency?
What is base and quote currency? The base currency is the first currency in a pair, and the quote currency is the second. The price says how much of the quote currency one unit of the base buys: EUR/USD at 1.10 means one euro costs 1.10 US dollars.
That convention decides what a chart shows, which side of a trade you hold and in which currency you are paid. The last EUR/USD price is on EUR/USD fundamentals.
Two positions in one
Every FX position is two positions. Buying EUR/USD buys euros and sells dollars; selling it does the reverse. There is no way to buy one currency without selling another.
A pair rises when the base strengthens against the quote. That can come from strength in the base, weakness in the quote, or both. A view on one currency is only half a trade.
Which currency you are paid in
- Profit and loss build up in the quote currency. One pip on a standard lot of EUR/USD (100,000 euros) is 10 dollars, so a 100-pip gain is 1,000 dollars.
- Your broker converts that into your account currency.
- The overnight swap follows the same structure. On a long position you earn the base currency’s interest rate and pay the quote currency’s; on a short position it is the other way round. Your broker keeps a markup.
The gap between those two rates is the interest rate differential. Today’s gap for every major pair is on Interest rate differential by currency pair, and the gap after inflation on Real interest rates by currency.
Picking the pair
Say you expect the dollar to weaken after a soft US inflation report. “Short the dollar” is not yet a trade, because the dollar is the quote in EUR/USD but the base in USD/JPY. Which side it is on in each major is on Major forex pairs: prices and fundamentals.
- To sell dollars against euros, you buy EUR/USD: you sell the quote.
- To sell dollars against yen, you sell USD/JPY: you sell the base.
Then look at the other half. If the euro’s outlook is soft while the yen’s is improving, selling USD/JPY puts the dollar view against the stronger partner, and the same dollar move can earn more.
Common mistakes
- Reading a falling USD/JPY as “the yen is down”. A falling USD/JPY is the dollar falling against the yen: the yen is up. Check which side is the base before reading any move.
- Analysing only one currency. A strong case for the base can still lose money if the quote is stronger.
Why every pair prices two economies against each other is in Currency Pairs and Relative Pricing.