Forex: markets reference

A currency pair expresses the value of one currency, the base currency, in terms of another, the quote currency. In EUR/USD, the euro is the base currency and the US dollar is the quote currency; a rate of, say, 1.10 would mean one euro can be exchanged for 1.10 US dollars. Pairs are grouped informally into majors, which include the US dollar paired with other widely traded currencies such as the euro, the Japanese yen and the British pound; minors, which pair two major currencies excluding the dollar; and exotics, which pair a major currency with the currency of a smaller or less frequently traded economy.

Currency trading follows the business hours of major financial centres, commonly grouped into the Sydney, Tokyo, London and New York sessions. Because these centres are spread across time zones, at least one session is open at almost any hour from Sunday evening to Friday evening in most time zones, with the market typically regarded as closed over the weekend. The London and New York sessions overlap for several hours each afternoon, London time, a period market participants generally note for higher trading activity in major pairs. Activity typically slows during the gap between the New York close and the Sydney or Tokyo open.

Central banks hold and trade currency reserves and influence exchange rates through monetary policy. Commercial and investment banks make up the largest share of daily trading volume, dealing both for clients and for their own accounts. Multinational corporations exchange currency to pay suppliers, receive revenue and hedge future transactions in foreign currencies. Institutional investors, including pension and hedge funds, trade currencies as part of broader portfolio strategies. Retail traders access the market through brokers offering online trading platforms, typically representing a small share of total volume compared with bank and institutional trading.

An exchange rate shows how many units of the quote currency are needed to buy one unit of the base currency, and is displayed with a bid price and a slightly higher ask price. Most major pairs are quoted to four decimal places, with the smallest standard price move called a pip; pairs involving the Japanese yen are conventionally quoted to two decimal places. Rates update continuously while the market is open, reflecting the latest prices banks and brokers are willing to trade at. Because forex is decentralised, the exact rate at a given instant can vary slightly between providers.

A pip is the smallest conventional price increment for most currency pairs. Leverage allows a trader to control a larger position than the cash deposited would otherwise permit, which magnifies both gains and losses. A spread is the difference between the bid and ask price. Going long means buying a currency pair in anticipation of the base currency strengthening against the quote currency, while going short means selling it. Central bank policy rate decisions, inflation data and employment reports are among the economic releases most frequently associated with currency-market activity.

Exchange rates can move quickly in response to economic data, central bank statements and geopolitical events, and leveraged forex trading can amplify losses beyond the amount initially deposited. Retail forex brokers are regulated in most major jurisdictions; in the United States the Commodity Futures Trading Commission and the National Futures Association oversee retail forex, while in the United Kingdom and the European Union the Financial Conduct Authority and national regulators under ESMA set rules including leverage limits for retail clients. This page describes how currency markets are organised and does not forecast future exchange rates or recommend any trading position.