What Is a Base and Quote Forex Currency? How to Read?

The foreign exchange (forex trading) market operates on the principle of trading currency pairs, where one currency is exchanged for another. To navigate this system effectively, it’s crucial to understand the roles of the base currency and the quote currency, the two components of every forex currency pair. This guide breaks down how these currencies function, how to interpret exchange rates, and what it means for traders in the global forex market.

What Is Base Currency?

When you trade in the forex (foreign exchange) market, you always deal with two currencies at the same time. These two currencies form a currency pair. The base currency is the first currency in this pair.
Let’s take an example: USD/GBP – In this pair, USD (United States Dollar) is the base currency, and GBP (British Pound) is the quoted currency.
The base currency shows what you are buying or selling. The quote currency shows how much of it you need to buy one unit of the base currency.
So, if the price of USD/GBP is 0.80, it means you need 0.80 British Pounds to buy 1 US Dollar. You will always see currency pairs written in this format: Base currency / Quote currency
Some other examples:

• EUR/USD – Euro is the base currency.
• JPY/AUD – Japanese Yen is the base currency.

Key Takeaways

• A base currency is the first currency listed in a currency pair; the quote currency is the second.
• Currency pairs show how much of the quote currency is needed to buy one unit of the base currency.
• Reading currency pairs correctly is essential for understanding exchange rates and making informed trading decisions.
• Forex trading and forex currency pairs trading involves direct and indirect quotes, cross rates and are influenced by market supply, demand, and economic conditions.
• Understanding how to read both base and quote currencies is fundamental for navigating the foreign exchange (forex) market effectively.

Understanding Base Currencies

The foreign exchange market, also known as forex or FX, is where people buy and sell different currencies. It’s one of the biggest and busiest markets in the world, with trillions of dollars traded every single day.

In forex, currencies are always traded in pairs. This means you are not just buying or selling one currency,  you are exchanging one for another.
These pairs are made up of:

• A base currency (the first one)
• A quote currency (the second one)

Currency pairs are usually written in this format: XXX/YYY or XXXYYY. Here, XXX is the base currency, and YYY is the quote currency.

For example:

• EUR/USD means Euro is the base currency, and US Dollar is the quoted currency.
• GBP/JPY means the British Pound is the base currency, and Japanese Yen is the currency.

Why Use Codes in Currency?

Each currency is represented by a three-letter code that makes it easier for traders and systems to understand. These codes follow a global standard called ISO 4217, set by the International Organisation for Standardization (ISO).

Here are some of the most common currency codes used in forex currency pairs:

• USD = U.S. Dollar
• EUR = Euro
• JPY = Japanese Yen
• GBP = British Pound
• AUD = Australian Dollar
• CAD = Canadian Dollar
• CHF = Swiss Franc
• CNY or RMB = Chinese Yuan (also called Renminbi)

How Forex Traders Use Currency Pairs

In the forex market, traders don’t just buy one currency. They are buying one currency and selling another at the same time. That’s why currencies always come in pairs.

Let’s take an example: A trader buys EUR/USD. This means:

• They are buying Euros (EUR) – the base currency
• And at the same time, they are selling U.S. Dollars (USD) – the quote currency

Now let’s say the Euro becomes stronger compared to the Dollar. That means it will take more Dollars to buy 1 Euro. If this happens after the trader has bought EUR/USD, they make a profit because the value of the base currency (EUR) has increased.

How Traders Make Decisions

Traders try to guess whether the base currency will go up or down in value compared to the quote currency. Based on this, they make decisions:

• If they think the base currency will rise, they buy the pair.
• If they think the base currency will fall, they sell the pair.

So forex trading is not about just one currency. It’s always about how one currency performs against another. The best forex trading in UAE, Eonefx will help you guide in using currency pairs in the best possible way.

How to Read Base Currencies

When you look at a forex currency pair, you’re actually seeing the value of one currency compared to another. This is shown using an exchange rate.

The format always follows this structure: Base Currency / Quote Currency = Exchange Rate

Let’s break that down with an example: EUR/USD = 1.55

• EUR (Euro) is the base currency
• USD (US Dollar) is the quote currency
• The number 1.55 is the exchange rat

This means: 1 Euro = 1.55 US Dollars

So, if you want to buy 1 Euro, you will have to pay 1.55 US Dollars. It works the same in reverse. If you want to sell 1 Euro, you will get 1.55 US Dollars.

Why This Matters for Traders

Forex traders use this number to make decisions. The exchange rate tells them how much one currency is worth in another currency. So, when the number goes up, the base currency is getting stronger (because you need more of the quoted currency to buy it).

When the number goes down, the base currency is getting weaker (because you need less of the quoted currency to buy it). Connect with Forex trading in the UAE to understand the importance of forex currency pairs.

Quick Tips:

• The base currency is always the reference point – it always equals 1.
• The exchange rate tells you how much of the quote currency you need to get 1 unit of the base currency.
• Whether you’re buying or selling, the exchange rate always shows the value of 1 unit of the base currency.

What Is a Quote Currency?

In the world of forex (foreign exchange), currencies are always traded in pairs. The second currency in that pair is called the quote currency (also known as the counter currency).

Let’s look at an example: EUR/USD = 1.55

• EUR (Euro) is the base currency
• USD (US Dollar) is the quote currency

The quoted currency tells you how much of it you need to get 1 unit of the base currency. So in this case, you need 1.55 US Dollars to buy 1 Euro.

The quote currency always appears after the base currency. It’s the currency used to measure the value of the base currency.

Some more examples:

• GBP/JPY = 180.25 – 180.25 Japanese Yen for 1 British Pound
• AUD/CAD = 0.90 – 0.90 Canadian Dollars for 1 Australian Dollar

So, the quote currency plays a key role in showing you how much a currency is worth.

Trading Currencies

To trade in the forex market, it’s important to understand how currency pairs work, especially how their prices are shown. Traders look at currency pairs to decide when to buy or sell. There are two main ways to look at currency pricing:

1. Direct Quote

• The quote currency is foreign
• The price shows how much foreign currency is needed to buy 1 unit of your local (domestic) currency

2. Indirect Quote

• The quote currency is your domestic currency
• The price shows how much of your local currency is needed to buy 1 unit of foreign currency

Let’s take an example for the U.S.-based trader:

• Direct quote: USD/JPY = 150 → 1 USD = 150 Japanese Yen
• Indirect quote: EUR/USD = 1.10 → 1 Euro = 1.10 US Dollars

Real-Life Trading

Currencies are mostly traded on the spot market, which means they are bought and sold right away, at the current market price. These prices are constantly changing, every second, based on supply and demand.

So, if more people want to buy a certain currency, its price (against the quoted currency) goes up. If more people want to sell it, the price goes down.

Example: How a Currency Trade Works

Let’s look at a simple example to understand how a currency exchange works in real life.

A trader wants to buy £400 (British Pounds) using U.S. Dollars (USD). The relevant currency pair is GBP/USD, which shows how many U.S. dollars (quote currency) are needed to buy one British pound (base currency).

Suppose: The exchange rate is GBP/USD = 1.4103

This means 1 British Pound = 1.4103 U.S. Dollars. So, to buy £400, the trader needs to multiply: 400 x 1.4103 = $564.12

Result: The trader needs $564.12 to buy £400

This is how traders calculate how much of one currency they need to exchange for another using the current exchange rate.

Cross Rate: When USD Is Not Involved

A cross rate is the exchange rate between two currencies that do NOT include the U.S. Dollar (USD).

Most currency exchanges involve the USD because it is the world’s main reserve currency. But sometimes, traders want to convert one foreign currency into another without using USD. That’s where cross rates come in.

Example:

Suppose a trader wants to exchange euros (EUR) for Japanese yen (JPY) directly. The EUR/JPY pair shows this exchange rate and is a cross rate, because it doesn’t involve the USD.

Now let’s also understand how quotes can change depending on location:

• USD/CAD = 1.3200 → This is a direct quote for a U.S. trader (USD is base, CAD is quote)
• EUR/USD = 1.1000 → This is an indirect quote for a U.S. trader (EUR is base, USD is quote)

Whether a quote is “direct” or “indirect” depends on which country you’re in and which currency is considered domestic.

Currency Pairs

In forex trading, currencies are always shown in pairs. One is the base currency, and the other is the quote currency.

How to Read a Pair:

• The first currency in the pair is the base
• The second currency is the quote
• The pair shows how much of the quote currency is needed to buy 1 unit of the base currency
  

Example:

GBP/USD = 1.4103

• GBP (British Pound) = base currency
• USD (U.S. Dollar) = quote currency
  This means 1 British Pound costs 1.4103 U.S. Dollars

What Affects Currency Pairs?

Several things can change how strong or weak a currency becomes:

• Economic activity (like jobs, trade, inflation)
• Central bank actions (interest rate changes)
• Government decisions (taxes, spending)
• Global events (wars, pandemics, natural disasters)

Most Traded Currency Pairs (as of 2023)

These were the top 10 currency pairs traded worldwide:

1. EUR/USD – Euro / U.S. Dollar
2. USD/JPY – U.S. Dollar / Japanese Yen
3. GBP/USD – British Pound / U.S. Dollar
4. AUD/USD – Australian Dollar / U.S. Dollar
5. USD/CAD – U.S. Dollar / Canadian Dollar
6. USD/CNY – U.S. Dollar / Chinese Yuan
7. USD/CHF – U.S. Dollar / Swiss Franc
8. EUR/JPY – Euro / Japanese Yen
9. EUR/GBP – Euro / British Pound
10. NZD/USD – New Zealand Dollar / U.S. Dollar

These are known as major pairs because they include the most stable and frequently traded currencies.

How to Read Quote Currencies

To read quote currencies in a forex pair, you need to understand that the quote currency is the second currency listed and shows how much of it is needed to buy one unit of the base currency (the first currency). For example, in the pair EUR/USD = 1.10, the euro (EUR) is the base currency and the U.S. dollar (USD) is the quoted currency. 

This means that 1 euro is equal to 1.10 U.S. dollars. So, if you are buying the pair, you’re buying euros and selling dollars; if you’re selling, you’re doing the opposite.

When the exchange rate rises, it means the base currency is gaining strength relative to the quoted currency, and when it falls, the base currency is weakening. Traders use this relationship to make decisions—buying a currency pair when they expect the base to strengthen or sell it when they expect the base to weaken. Understanding the role of the quote currency can be simplified with our Best Forex Trading in UAE that will help you interpret exchange rates and execute more informed trades.

Frequently Asked Questions (FAQs)

1. What is the difference between a base currency and a quote currency?

A base currency is the first currency listed in a currency pair and represents the currency you are buying or selling. The quoted currency (or counter currency) is the second currency in the pair and tells you how much of it you need to buy one unit of the base currency.

For example, in EUR/USD = 1.10, EUR is the base currency, and USD is the quote currency—it means €1 equals $1.10.

2. Why is it called a base currency?

It’s called a base currency because it serves as the reference point or the “base” for the transaction. All pricing and trading decisions revolve around how much of the quote currency is required to buy one unit of the base currency.

3. What happens when a base currency is stronger than a quote currency?

If the base currency strengthens, it means you’ll get more of the quote currency for each unit of the base. For instance, if EUR/USD moves from 1.10 to 1.20, the euro has become stronger, and now one euro buys more U.S. dollars. This often indicates economic strength or positive sentiment around the base currency’s country.

4. What is foreign exchange (Forex) trading?

Forex trading is the process of buying and selling currencies on the foreign exchange market with the goal of making a profit. It’s one of the largest financial markets in the world, and it operates 24 hours a day, five days a week.

5. When is currency trading conducted?

Forex trading takes place 24 hours a day during the business week, Monday to Friday, and follows global financial markets in major cities like Sydney, Tokyo, London, and New York. This means traders can react in real time to news, events, and market movements.

6. Who regulates currency trading?

Forex trading is regulated by different financial authorities in various countries. For example:

• United States: National Futures Association (NFA), Commodity Futures Trading Commission (CFTC)
• UK: Financial Conduct Authority (FCA)
• Australia: Australian Securities and Investments Commission (ASIC)
• Europe: European Securities and Markets Authority (ESMA)
  These regulators help ensure transparency and protect traders from fraud or malpractice.

7. Which currency should I choose when trading?

It depends on your trading goals and risk tolerance. Most beginners start with major currency pairs like EUR/USD, USD/JPY, or GBP/USD because they are more stable and highly liquid. It’s wise to choose currencies from economies you can understand or keep track of.

8. How do I choose a base and quote currency?

Traders choose a base and quote currency based on:

• Market analysis (e.g., economic performance, interest rates, political stability)
• Trading strategy (e.g., trend-following, scalping)
• Volatility and liquidity of the pair
  Typically, the currency you believe will gain strength should be your base, while the one expected to weaken is your quote.

The Bottom Line

Mastering the concepts of base and quote currencies is essential for anyone involved in forex trading with the best Forex trading in the UAE, Eonefx. These two components form the foundation of how exchange rates are quoted and interpreted. 

Whether you’re analyzing currency pairs, planning trades, or evaluating market conditions, knowing how to read and differentiate between the base and quote currencies can significantly enhance your trading strategy and confidence. By building a solid understanding of Base vs Quote Currencies and the forces that affect them, you’ll be better equipped to navigate the dynamic world of forex with clarity and precision.