8 Economic Indicators and Events All Forex Traders Need to know

Dual View

Most participants in the stock market are accustomed to forming a single directional view on an asset. When an investor analyses a company such as Tata Consultancy Services, the conclusion is essentially binary: the stock is either expected to rise or fall, and the position taken reflects that judgement accordingly. Currency trading operates on a fundamentally different principle. Every position in a currency pair carries two simultaneous views, whether the trader is conscious of it or not.

Consider the USD-INR pair. A trader who buys this pair is not simply expressing confidence in the US Dollar. By the very structure of the trade, that same trader is simultaneously expressing a negative view on the Indian Rupee. The two opinions are inseparable.

Why does this duality exist?

The answer lies in how currency value is defined. As established in the preceding chapter, a currency’s worth is never absolute. It is always expressed relative to another currency. The standard format remains:

Base Currency divided by Quotation Currency equals Value

This format communicates how many units of the quotation currency can be obtained for one unit of the base currency. A position on the pair is therefore always a position on the relationship between the two, not on either one in isolation.

To make this concrete, suppose the USD-INR rate stands at 82, and a trader anticipates it will rise to 85. That expectation implies that one US Dollar will soon purchase more Indian Rupees than it does today. In other words, the base currency (USD) is expected to strengthen, which by definition means the quotation currency (INR) is expected to weaken. Buying the pair reflects a bullish view on the Dollar and a bearish view on the Rupee simultaneously.

The reverse holds equally true. A trader who sells the USD-INR pair is expressing the view that the US Dollar will weaken relative to the Indian Rupee. The base currency is expected to buy fewer Rupees in the future, meaning the Rupee strengthens as the Dollar softens. This is a bearish view on USD and a bullish view on INR.

Two specific scenarios clarify the concept of strengthening and weakening further.

When USD-INR moves from 82 to 84, the US Dollar has strengthened. One Dollar now purchases more Rupees than before. The base currency has appreciated; the quotation currency has depreciated.

When USD-INR moves from 82 to 80, the US Dollar has weakened. One Dollar now purchases fewer Rupees. The base currency has depreciated; the quotation currency has appreciated.

The terms strengthening and weakening are used interchangeably with appreciation and depreciation throughout financial markets. A financial advisor discussing currency exposure in a portfolio will typically use all four terms, often within the same conversation. Familiarity with each is essential for anyone engaging with the stock market at an intermediate level or beyond.

Before progressing further, one additional concept warrants attention. Much like shares traded on an exchange, currency pairs carry what is known as a two-way quote. This quote reveals the rates at which a given pair can be bought or sold at any given moment.

The two-way quote is more commonly referred to as the Bid and Ask rate.

To illustrate using an internationally traded pair, consider EUR-USD quoted as follows on a Forex trading platform.

EUR-USD: 1.1269 divided by 1.1270

The lower figure, 1.1269, is the Bid rate. This is the rate at which a trader can sell the pair, effectively going short on the Euro and long on the US Dollar.

The higher figure, 1.1270, is the Ask rate. This is the rate at which a trader can buy the pair, effectively going long on the Euro and short on the US Dollar. The difference between the two figures reflects the spread, which represents the transaction cost embedded in the quote.

In standard Forex convention, this same pair might be expressed in shorthand as follows.

EUR-USD: 1.1269/70

In this abbreviated format, the Bid price is written in full whilst only the final two digits of the Ask price are shown, as the remaining digits are identical. This shorthand is widely used across international currency desks and electronic trading platforms.

Within Forex markets, individual price increments are referred to as pips. A pip represents the smallest standardised unit of movement in a currency pair’s quoted value. If EUR-USD moves from 1.1270 to 1.1274, the pair has moved four pips. Tracking pip movements is fundamental to understanding profit, loss, and risk in currency trading, and forms the basis upon which trading calls in the Forex space are typically framed.