FX Mechanics in forex
FX mechanics is the plumbing of the currency market: why a pair is always one currency priced in another, what actually moves an exchange rate, and how interest-rate differentials and capital flows feed through to price.
These guides build the mental model that the rest of fundamental analysis sits on, so the data and the central banks make sense in context.
Guides
2 in-depth guides on fx mechanics.
Why a Currency Pair Is Always a Relative Price
There is no such thing as the dollar going up on its own. A currency only has a price relative to another currency, so every pair is a tug-of-war between two economies. Here is what that mental model changes about how you trade.
The Anatomy of a Rate Differential
Capital flows toward the higher yield, so the interest-rate gap between two economies is the single biggest force behind a pair. Here is how to take that gap apart: nominal versus real, spot versus expected, and the moment it breaks.
Key terms
Plain-language definitions of the terms behind fx mechanics.
Base and Quote Currency
What are the base and quote currency? The first and second currency in a pair: the price shows how much of the quote one unit of the base is worth.
Carry Trade
What is a carry trade? Borrowing a low-yielding currency to hold a high-yielding one, earning the interest rate differential as daily swap while the position is open.
Interest Rate Differential
What is an interest rate differential? The gap between the policy rates of a currency pair's two central banks, the structural force behind carry and long-term FX trends.
Swap (Rollover)
What is swap in forex? The daily interest paid or earned for holding a position overnight, derived from the interest rate gap between the pair's two currencies.