Pound edges up on Bank of England hike bets: base and quote currency

The British pound firmed against the US dollar on Tuesday as traders bet the Bank of England (BoE) will raise interest rates in November. The ECB reference rate for GBP/USD on 13 October was 1.3246, up 0.08% from 1.3235 at the 12 October fixing.

FXStreet reports that sterling was up 0.28% on the day, trading at 1.3244, as investors seemed confident in a November BoE hike. According to the investingLive Asia-Pacific wrap, BoE policymaker Greene warned that waiting for second-round inflation effects would be too late. On the other side, the dollar index slipped from its 18-month high ahead of US consumer price data, FXStreet reports. That September CPI report is due on Wednesday at 12:30 GMT, with headline inflation forecast to rise to 3.6% from 3.4%. Our sister site has a wider look at the dollar's retreat from its 18-month high before US CPI.

What is base and quote currency?

Every forex price compares two currencies. The first one in the pair is the base currency. The second one is the quote currency.

The price tells you how many units of the quote currency you need to buy one unit of the base currency. In GBP/USD, the pound is the base and the US dollar is the quote. So a price of 1.3246 means one pound costs 1.3246 dollars.

This gives a simple rule:

• If the price rises, the base currency got stronger (or the quote got weaker).
• If the price falls, the base currency got weaker (or the quote got stronger).

The order of the pair is a market convention. It does not change the value, only how it is written.

A worked example

We use official ECB fixings, which are set once per business day. They are reference rates, not live quotes.

GBP/USD (pound is base):

1. 12 October fixing: 1.3235. So £1,000 × 1.3235 = $1,323.50.
2. 13 October fixing: 1.3246. So £1,000 × 1.3246 = $1,324.60.
3. Difference: $1,324.60 − $1,323.50 = $1.10 more for the same £1,000.

The price rose, so the base currency, the pound, strengthened.

Flipping the pair: to see how many pounds one dollar buys, divide 1 by the price. 1 ÷ 1.3246 ≈ 0.7549. So $1 bought about £0.7549 at the 13 October fixing.

USD/JPY (dollar is base): here the dollar comes first. The fixing fell 0.30%, from 158.60 to 158.12.

1. $1,000 × 158.60 = ¥158,600.
2. $1,000 × 158.12 = ¥158,120.
3. Difference: ¥480 fewer yen for the same $1,000.

The price fell, so the base currency, the dollar, weakened against the yen. Notice the trap: in GBP/USD the dollar is the quote, while in USD/JPY it is the base. A weaker dollar pushes GBP/USD up but USD/JPY down.

You can follow both pairs on the GBP/USD chart and the USD/JPY chart.

Why it matters for new traders

News is usually about one currency. Today's story is a stronger pound and a softer dollar. To turn that into a price move, you must know which side of the pair each currency sits on.

This matters most around big data. FXStreet reports that OCBC, Commerzbank and ING see the dollar on solid footing for now, supported by higher oil prices, firm US yields and Fed tightening expectations, but none expects a decisive breakout or sharp reversal soon. Whatever Wednesday's CPI shows, a dollar move will show up in opposite directions across pairs. GBP/USD and EUR/USD have the dollar as quote. USD/JPY, USD/CHF and USD/CAD have it as base.

Getting this backwards is a common beginner mistake. It can make you read a weaker dollar as a stronger one.

Key terms

• Base currency: the first currency in a pair. The price is for one unit of it.
• Quote currency: the second currency. The price is shown in units of it.
• Currency pair: two currencies written together, such as GBP/USD.
• Inverse rate: 1 divided by the price, showing the pair the other way round.
• Reference rate (fixing): an official daily rate, such as the ECB's, not a live trading price.
• CPI: the Consumer Price Index, a key measure of inflation.