(3) A simple basis for buying and selling a currency pair in foreign exchange transactions

In the following examples, we will use the most basic methods of analysis to help us decide whether to buy or sell a particular currency pair.

EUR/USD

In this example, the euro is the base currency for the pair.

If you think the US economy will continue to deteriorate, which is bad for the dollar, you can enter the market and buy EUR/USD. This means you are bullish on the euro and short the dollar. Conversely, if you think the US economy will continue to improve, the dollar will rise and the EUR/USD will fall, you need to enter the market and short the pair.

USD/JPY

In this example, the US dollar is the base currency of the currency.

If you think the Japanese government will implement a "weak yen" policy, then you can go long USD/JPY, which shows that you expect the pair to rise.

Similarly, if you think that Japanese investors are converting all their dollars into yen from the US financial marekt, or that Japanese multinationals are repatriating profits back to Japan, then this could put pressure on the dollar and the yen will be supported by buying, which will strengthen. At this point, you need to sell the USD/JPY currency pair.

GBP/USD

In this example, the pound sterling is the base currency.

If you believe that the UK economy will continue to grow and perform better than the US economy in the long run, then you can expect the UK monetary authorities to tighten policy and the pound to rise, at which point you need to buy the GBP/USD pair.

On the contrary, if you think the UK economy is in recession and the US economy continues to grow, you need to sell the pound and buy the dollar.

USD/CHF

In this example, the US dollar is the base currency.

If you think the Swiss franc is overvalued and the SNB may intervene by buying dollars and selling the franc, then you need to buy USD/CHF. Likewise, if you think the US economy is slowing down or the market's safe-haven demand is rising, and the Swiss franc as a safe-haven ratio is supported by safe-haven buying, then you need to short the US dollar/CHF.