In a currency pair the first currency is the currency we can buy and sell and the second currency is the currency we buy and sell it with taking the quotation usdchf this means that today it’s necessary to pay one Swiss franc 24 Sanh teams for one American dollar similarly this quote usd/jpy tells us that today in Japan they’ll give you a hundred and twelve yen for one American dollar the first currency in a currency pair is the base currency for the yen the Swiss franc and the majority of other currencies in the world the US dollar is the base currency and are there any currency pairs where the US dollar is not the base currency yes whose idea was that why make life more complicated than it needs to be I can only say two little words tradition and ambition at the time when the concept of currency pairs was being developed the British Empire was the dominant economic power the British Pound is the oldest currency in the world in fact it will soon be celebrating its thousandth birthday for most of the pounds life until the early 1970s the pound was made up of 240 pence how could we show the value of 1 dollar in terms of GBP for example if one dollar was worth sixty British pence we’d have to write it as nought point two five and not nor point six and this could cause a great deal of confusion therefore it was decided that it would be much easier to state how much a pound was worth in other currencies and not be tormented by all those pesky pennies farthings and shillings the pound is the base currency in the pair gbp/usd and though the British Pound has had a hundred pence since the 1970s and Britain no longer has a great Empire the tradition remains my friends and so this pair tells us that today one British pound will cost you one dollar and 82 cents however when the Europeans were introducing their single currency they quite consciously decided not to be bettered by the world’s oldest currency and insisted on the Euro being the base currency there was no need the metric system was laid out in Europe a very long time ago this was simply naked ambition ladies and gentlemen and the pair euro USD appeared with the Euro proudly assuming the base currency place and the quote euro USD means that today a euro will cost you one dollar twenty four cents you should commit these pairs to memory dollar Swiss franc dollar Japanese yen British Pound dollar euro dollar because usually these pairs are denoted Swiss franc Japanese yen British Pound euro as the dollar is taken as red and is not mentioned.
Now I’m gonna explain exactly what a currency pair is and what it is that makes these markets go up and down,we’ll go right back to basics when we do when we look at markets you know plenty others will look at currencies the various currency pairs see what’s moving see where the opportunities might be but I think for plenty of people who are new to this it can still be an element of confusion as to what exactly a currency pair is but what are these numbers means so I thought this week let’s just let’s just clear up any misconceptions or misunderstandings that people have about currency pairs you know if you’ve been doing this for just a few weeks you’ll know what it is you know pound US dollar is the exchange rate between the pound and the US dollar but let’s go right back to the basics what are these rates mean and when we’re looking at them you know how can they actually move around and what influences them let’s take a look first of all at what exchange rates actually are so let’s start right from the absolute basics so what is the currency what’s what’s a foreign exchange pair here we go this is pound u.s. dollar so it’s the exchange rate of a pound versus the US dollar the example I’m using here the example rate I’m using is one point three eight the easiest way of explaining this is how much of the second currency would one of the first currency by so in this example what it means is one pound will buy you at the current rate one dollar and 38 cents okay so it says it’s as straightforward as that and of course if the pound strengthens let’s say let’s say the market moves to one point four zero zero zero then it just means that one pound now buys is a little bit more it will buy us a dollar and 40 cents just to make this all make sure this will make sense one more example Euro against the British Pound so again how much does one of these bar of the second currency so in this example one euro if you’re coming over from Paris to London for the weekend will buy you nor 2.88 of apparent so obviously 88 pence in this example you could quote it the other way I mean we could we could have a look at sterling euro let’s bring up the exchange rate for that so it’s simply that exchange rate turned on its head so it’s one over that exchange rates of sterling euro one pound will buy you one euro thirteen that just over 1 euro thirteen and a half okay but there’s a market convention way of quoting this stuff so whilst you could say US dollar pound sterling euro the typical conventional way of quoting it is a pound to US dollar or euro sterling in this example but it’s all about how much of the second currency does one of the first currency by so there we go the easiest way of explaining it is how much of the second currency does the first currency by you know that that’s it that that is an exchange rate and if the markets more optimistic about the outlook for the first currency then it will go up in price but to see these moves on a chart so to look at some real markets let’s take a look at the trading platform at some of the moves that we’ve seen in our for example the Pound u.s. dollar sickly the charts here’s a simple line chart in the real world pound US dollar so this is going back to about March 2017 so you can see back then a pound would buy you arrive at one twenty four so one point two four zero zero so a parent would buy you a dollar and twenty four cents at the moment at the time of recording we’re up here to the pound has strengthened so what we’re seeing here the pound gaining ground against the dollar another way of saying it is we’ve seen dollar weakness but as its pound US dollar the chart is going up so now a pound buys you about one point three eight so a dollar thirty eight so it’s a move in excess of ten percent really the pound has strengthened by just over ten percent going from 124 to 138 in what the past ten months versus the US dollar and of course we’re looking at a longer term chart here but we’ll see plenty of changes throughout the day you know these markets do tend to be as I’m sure you’re aware pretty active markets and just another quick one to show how political events really can affect currency markets because they are so tied to the to the country’s economy and its political stability back here this is the that the vote of course the famous vote for the UK to leave the European Union the expectation was the UK population we’re going to vote stay in it ended up being something a shock when we voted the UK voted to leave and start the brexit process so you can see the night before a pound would buy you a dollar 48 so $1 48 cents the very next day because of the volatility or over the next couple of days it would only buy you one dollar thirty two cents so we saw a drop again of more than ten percent but this time it took almost a matter of hours to play out so that shows how extreme political uncertainty or political shocks can really affect a country’s currency so when it comes to what drives currency markets is a whole host of things you know clearly the economic health of that particular area for example the pound against the Japanese yen will be one factor interest rates come out to play as we’ve seen political decisions you know like the brexit decision from June 2016 had a massive impact what central banks are thinking about doing with interest rates again can cause volatility in in in currency markets but hopefully you know if you’re a little bit confused and you’ve never looked at these markets before that’s cleared up hopefully any any misunderstandings or confusion you had about how exchange rates automatically every time we upload a new video but for this week from me David Jones and trading 2 & 2 we’ll leave it there .