Exchange Rates: How are they set?

Exchange rates ebb and flow. How do they do that, and why?

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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

Updated: 23 Oct 2019 09:56:47 UTC

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)
BarclaysBarclays £10,000 €10,560
Mid-Market RateMid-market rate £10,000 €10,863
Global ReachGlobal Reach £10,000 €10,803

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, Global Reach are offering €10,803, a much better deal.

Compare all money transfer providers

Table: sorted by a combination of service offering and the amount your recipient will receive

Min. Transfer Amount Transfer Speed Online Transfer Fee Rate Amount Received Description CTA Details
GBP 2,000 1 day GBP 0.00 1.145 EUR
TorFX guarantee to beat any competitor's exchange rate for a transaction (conditions apply)
(Conditions apply)
Go to site Show details
GBP 1,000 1 - 2 days GBP 0.00 1.145 EUR
Better exchange rates for Finder customers.
Send 60+ currencies at competitive rates and no fees. If you find a better eligible quote, WorldFirst will beat it.
Go to site Show details
GBP 3,000 1 day GBP 20.00 1.145 EUR
Make an informed decision with a personal touch, whether it's a business or personal transfer, with rate alerts, charts and live rates to help you make your choice. Go to site Show details
GBP 2,500 1 day GBP 0.00 1.145 EUR
Make transferring money abroad as simple and safe as possible with bank-beating exchange rates - online, via the app or over the phone. Go to site Show details

Compare up to 4 providers

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