An exchange rate is a price. It is the price of one currency measured in another, and like any price it moves when the people buying and the people selling stop agreeing on what something is worth. That is the whole idea. Everything else is detail about who is buying, who is selling and why they changed their minds this morning.
Nobody sets the number. The Bank of England says so directly on its explainer page: it does not set the exchange rate, and the rate for the pound is decided by supply and demand. Most major currencies work the same way. A few do not, and we will get to those, but for the moment think of the rate as the result of a very large, very continuous auction.
The auction that never really closes
The foreign exchange market is enormous. The Bank for International Settlements, which runs a survey of it every three years, put average turnover at about $9.6 trillion a day in April 2025. The US dollar was on one side of roughly 89% of those trades.
Those are not tourists swapping cash. They are banks, funds, companies paying for imports, governments, and the dealers who sit between them. Each deal nudges the price a little. Add up millions of nudges and you get a rate that is different at 9:00 from what it was at 8:59.
So the honest answer to “why does it change every day?” is simple. Because trading does not stop for the evening. There is always somebody, somewhere, with a reason to buy or sell.
Step one: people need a currency
Start with the plainest cause. A company in India buys machinery from a supplier that wants dollars. The company has rupees. To pay, it sells rupees and buys dollars. That one trade adds to the demand for dollars and the supply of rupees.
Now multiply it. Importers need foreign money to pay for goods. Exporters receive foreign money and want to convert it home. Tourists, students paying tuition, families sending money across borders: all of them are swapping one currency for another because they have to, not because they have a view.
If, on a given day, more people need to buy dollars than sell them, the price of the dollar rises against everything else. If the flow tips the other way, it falls. Real-economy flows rarely balance exactly. The gap is the movement.
Step two: investors want a return
Investors are the group that moves prices fastest. They are not buying a currency to use it. They are buying it to hold, or to hold a bond or share denominated in it, and they want to be paid.
Here is the mechanism, in order.
- A central bank raises its policy rate, or the market starts to expect it will.
- Deposits and government bonds in that currency now pay more than before.
- International investors who want that higher return must first buy the currency.
- That extra buying pushes the currency up.
The Bank of England describes this link too: typically, if Bank Rate goes up, so does the strength of the pound, because higher UK rates lead investors to demand more pounds. The reverse also holds. It is a tendency, not a law. Plenty of other things can swamp it in any given week.
We cover the rates story properly in a separate guide. The point here is only that expectations count as much as the actual decision. A rate cut that everybody saw coming can do almost nothing, because the buying and selling happened weeks earlier.
Step three: news changes the expected future
A currency is partly a claim on a country’s future. Anything that changes the likely future changes the price now.
An inflation report comes in hotter than forecast. A jobs number disappoints. An election result looks messy. A trade deal collapses. Each piece of news changes what traders think the central bank will do next, or how safe the economy looks. The Bank of England page makes the second point too: an economy viewed as safe and sound attracts investment, and that supports the currency.
Notice what matters. It is the surprise, the gap between what happened and what was already priced in. Good news that everyone expected moves nothing. Slightly bad news that nobody expected can move quite a lot.
A worked example, with made-up numbers
These figures are illustrative, not a forecast and not a real quote. Suppose the pound is trading at 1.2500 US dollars. A US jobs report lands stronger than expected. Traders now think American interest rates will stay higher for longer, dollar deposits look more attractive, and some of them sell pounds to buy dollars. Within the hour the rate slips to 1.2375.
That is a fall of 0.0125 dollars, or exactly 1.0% (1.2375 divided by 1.2500 gives 0.99). It sounds trivial. Here is what it does to someone sending pounds to a dollar account.
| Amount sent | Value at 1.2500 | Value at 1.2375 | Difference |
|---|---|---|---|
| £500 | $625.00 | $618.75 | $6.25 less |
| £2,000 | $2,500.00 | $2,475.00 | $25.00 less |
Nobody planned that $25. It came from a data release in another country, published while the sender was probably asleep. Had the report disappointed instead, the same 1% would have gone the other way, and the sender would have gained. That is the day-to-day experience of floating rates: small, two-sided and impossible to schedule.
Step four: the market itself amplifies things
Moves can be larger than the news deserves, and the reason is mechanical. Many traders leave automatic instructions, usually called stop orders, to sell if a price falls to a chosen level. When the price touches that level, a pile of them can fire at once, which pushes the price further. Quiet trading periods can make this worse, because fewer counterparties are around to absorb the flow.
Sentiment does the rest. When investors get nervous about the world, they tend to move money into currencies seen as safe, which can lift those currencies for reasons unrelated to their home economies. Economists argue about how much of daily movement is “fundamental” and how much is plain noise. Nobody has a clean answer, and anyone claiming one is selling something.
Why some currencies barely move
Not every currency floats. Some governments fix their currency to another, usually the dollar, and the central bank buys and sells to hold the rate steady. The UAE dirham is the well-known example. Its rate against the dollar sits almost still while the euro or the pound drifts around it. That is a policy decision, backed by reserves, and it comes with its own trade-offs.
If you want to see the contrast live, open GBP to USD and compare it with the US dollar page, then scan the whole rates grid. Pegged currencies look flat. Floating ones wander. Rates refreshed hourly, so the picture you see is a recent snapshot, not a tick-by-tick feed.
What this means if you are moving money
You cannot predict the daily wobble, and neither can the professionals who do this for a living. What you can do is understand its size and plan around it.
If you are converting a small amount, the day-to-day movement is usually smaller than the fee and margin you pay, so the provider’s pricing deserves more of your attention than the timing. If you are converting a large amount, such as a deposit, tuition or a house payment, the movement can matter more than anything else. Some people split a big transfer into a few chunks to avoid committing everything on one unlucky afternoon. That is not cleverer, just less exposed. For anything large, ask your provider or an adviser about options.
A rate on a screen is a market price at a moment. The rate you are actually offered will differ slightly, and that gap is a separate subject.
Sources
- Who sets exchange rates? (Bank of England)
- OTC foreign exchange turnover in April 2025 (Bank for International Settlements)
- BIS Triennial Central Bank Survey 2025 press release
Checked: November 2026
