Forex Market and Functioning of Currency Pairs
In this article we will go through some of the forex market features which will help to increase your knowledge about the market. We will also explore the various factors of forex market that are part of it so that you develop better understanding of how everything functions.
We will start by giving you some details about how currency market works. First of all it does not have any central market and secondly the foreign exchange market is devoid of regulations or laws that can be enforced at trans-country level.
How the market functions?
Forex market functions on OTC basis and because of it there are several interconnected markets in which trading occur for different currency instruments. The markets also do not have a single forex rate but forex traders put in the effort to keep rates similar to what is prevailing in other markets and discourage arbitrage.
Main Quoted Price
London market price is the main quote price in forex market due to country�s dominant place in the industry. Along with LMP there are other market players also such as New York, Hong Kong & Tokyo who have their role in day to day trading.
The fluctuations in rates occur primarily due to different kinds of monetary flows. The rates are also influenced by expectations that these monetary flows will transform when GDP grows, there are trade surpluses, budget deficits or inflation starts.
Currency Trading Norms
Forex product is created when trading takes place consisting of different currencies. The currency pair thus formed has a format of eeefff or eee/fff where eee & fff refer to the currency code of two countries with the first one being the base and second one the quote currency.
The rates are generally quoted against the US dollar and it is the base currency also in almost all trade except when the trading includes currencies such as AUD, GBP and EUR. One example of how it works, if we have a currency pair such as GBPEUR 2.7723 then here 1 GBP will be equal to 2.7723 EUR.
There is another point which you should be aware, suppose due to some reasons a particular currency is affected then the different currency pairs it is part of will also get affected. Currency correlation also develops in various currency pairs which have this particular currency in it.
In foreign exchange market the following currency pairs are traded more than others:
1. Pair of Euro and US dollar which has a share of 20% or more
2. Pair of US dollar and Japanese Yen with 10% or more share
3. GBP and US dollar have 5% or more share of the market
As a conclusion we can say that the article provides enough information to help you become more aware about functioning of foreign exchange market and the main factors which effect daily trading. The details provided here will help you know about the causes for fluctuations in rates as well as how different currency pairs work.