What affects exchange rates

Exchange rates are changing every second and for a wide variety of reasons. Understanding some of the key factors that drive exchange rates is key to helping you make an informed choice about how and when to buy foreign currency.

Technically any currency buy or sell of any amount is contributing to movements in the currency market. That £100 of Euros for a holiday will be a small factor driving this trillion dollar per day market place. But let us look at some of the other more relevant factors driving this industry.

Why do exchange rates fluctuate?

The movement of the exchange rates up and down is driven by the continuous buying and selling of currency, principally by banks and institutional investors. They will generally be basing these buying and selling decisions on the new information that they receive on whether analysts believe a currency will strengthen or weaken.

What types of information affects exchange rates?

The main driver of fluctuations in exchange rates is economic data, such as economic growth, inflation, unemployment and housing figures, and how these affect monetary policy. Understanding the direction of policy by a central bank can be a great predictor of future behaviour on that currency. Another key influencer of exchange rates is Politics, especially significant events such as the EU referendum or an election.

Other factors that can affect exchange rates are natural disasters, war and acts of terrorism. Anything that can lead to uncertainty for a country’s economic growth can result in volatility in exchange rates.