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Parity definition
Parity is a state in which two financial values are equal or economically equivalent. It most often describes a 1:1 relationship, such as one currency buying exactly one unit of another.
In forex, parity means one unit of a currency buys exactly one unit of another, so EUR/USD at parity reads 1.0000. The level often works as a psychological marker, and price frequently reacts as it approaches or crosses it. Parity also appears in other markets, such as put-call parity in options and conversion parity for convertible bonds.
Parity is not the same as a currency peg. Parity is simply the market level where two values meet, reached and crossed freely by supply and demand. A peg is a fixed rate that a central bank actively defends, so it holds the rate in place rather than letting the market set it.
Parity Example
You are watching EUR/USD, which trades at 1.0000.
This means 1 euro equals 1 US dollar.
The pair sits at parity, because the two currencies hold a 1:1 exchange rate.
If EUR/USD rises to 1.0500, the euro trades above parity against the US dollar. If it falls to 0.9500, the euro trades below parity against the US dollar.
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