Exchange Rates: How are they set?
Exchange rates ebb and flow. How do they do that, and why?
Exchange rates are the rate at which one currency will be traded for another, and can also be viewed as the value of a currency in relation to another. The mid-market rate is determined on the foreign exchange market, which is open to buyers and sellers 24 hours a day.
The mid-market rate
Traders on the world’s currency markets buy and sell currencies at different rates. In turn, these offers are how the mid-market rate is defined. It is simply the midpoint between the demand and supply for a currency, meaning it changes all the time. This is the best rate you could possibly get, and is what you would get if a company was really charging you 0 fees and 0% commission.
Historical Rate chart of GBP and EUR
The above graph shows the fluctuations for the GBP/EUR exchange rate, set by the rates buyers and sellers are offering on the market.
What factors influence exchange rates?
How much demand there is for a certain currency will determine a currency’s value in relation to another. For example, after the UK voted to leave the EU, the value of the Pound fell drastically fell. By January 2017, the Pound had fallen around 20% against the US Dollar. Other factors, such as interest rate decisions, changes in unemployment rates, inflation reports, GDP numbers and manufacturing statistics can all have an influence on the value of a currency, and therefore its exchange rate.
Quotes by banks and specialist companies
Banks and ForEx companies will often quote a different rate than the mid market rate, as a form of commission to make a profit on a currency transfer. They may not tell you about this, but it’s important to know if you’re being secretly charged or not.
To illustrate this, we’ve compared the rate that a ‘big four’ bank will offer you – Barclays – against the mid-market rate.
|Amount sent (GBP)||Amount received (EUR)|
At these rates, Barclays are taking a commission of 2.87% (calculated 01/09/2017), plus their fees (at least £5). Compare this to a specialist money transfer company, and you could be getting a much better deal. As you can see, FC Exchange are offering €10,803, a much better deal.
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