What it means
A cross rate is an FX pair where neither currency is USD. The price is mathematically derived from the two underlying USD pairs: EUR/GBP price ≈ EUR/USD × (1 / GBP/USD). The most traded crosses are EUR/GBP, EUR/JPY, GBP/JPY, AUD/JPY, EUR/CHF. Cross rates inherit volatility from both underlying USD legs and have spreads typically 1.5-3x the worse of the two USD legs.
Why it matters
Crosses are where carry trades, correlation pairs trading, and EM-meets-DM exposures live. The intra-G7 differential plays (EUR/JPY for euro-yen rate differential, AUD/NZD for AU-NZ commodity spread) all happen on crosses. Knowing the cross is derived rather than directly priced means you understand why volatility spikes when either USD leg has a news event — even though USD isn't in the pair you're trading.
How to use it
When trading a cross, check both underlying USD legs for upcoming events. EUR/JPY position before US NFP is implicitly exposed to USD-driven moves in EUR/USD and USD/JPY that both feed into EUR/JPY. Triangular-arbitrage HFT firms ensure cross rates stay within a few pips of theoretical fair value — you can't profit from misalignment, but you should be aware the cross moves in response to events on either USD leg.
EUR/USD = 1.0850, GBP/USD = 1.2640. Implied EUR/GBP = 1.0850 / 1.2640 = 0.8584. If the screen quotes EUR/GBP at 0.8584 ± 1 pip, the cross is at fair value. >2 pip deviation typically gets arbitraged in <1 second.
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