What does liquidity in the foreign exchange market signify?

Liquidity in the foreign exchange market signifies how easily a currency can be bought or sold without affecting its price. This characteristic is crucial for participants in the market, as higher liquidity typically means that there are more buyers and sellers available. As a result, transactions can be executed quickly and with minimal price fluctuation, which is essential for traders looking to enter and exit positions efficiently.

In highly liquid markets, the bid-ask spread tends to be narrower, allowing for better pricing. The ability to convert one currency into another easily impacts not just traders but also businesses engaged in international trade, as it allows for smoother economic transactions. Thus, liquidity is a fundamental aspect of currency markets, reflecting their efficiency and functionality.