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What affects an exchange rate?

Here's a handy read from our currency partner Global Reach, talking about why your exchange rate may be moving, and how you can make the most of your overseas money transfer.
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Markets move every day, and sometimes currencies can rise or fall sharply in the space of minutes. There are a number of things that can influence an exchange rate, including economic data, central bank developments, and politics; but why do they cause market movement? 

1) Economic data

Each country produces data that details how well its economy is performing. It measures lots of different economic aspects, such as retail sales, growth, consumer confidence, inflation, and sector-specific performance. These stats are released weekly, monthly, and quarterly, and can be very influential for exchange rates. If a country’s economy is performing well, the native currency can rise. This is because investors might feel that the currency will continue to increase if strong data persists, or the nation’s central bank might be inclined to heighten interest rates.

If a country isn’t performing well, risk sentiment could be lowered, and the currency could be sold off resulting in a decline in exchange rates.

2) Central bank events

Country’s with higher interest rates can be more appealing for investors as they offer a higher yield. Therefore, when a central bank increases interest rates, or hints a rate hike cycle could begin, a currency may become more popular. Similarly, if a central bank decides to cut rates, it might cause an exchange rate to fall. Comments from central bankers can also create market movement, so meeting minutes and speeches between monetary policy meetings can also be eventful.

3) Politics

Politics might not seem like an obvious market influencer, but Brexit is a prime example of how much an event can impact a currency. The Pound fell by around 20% after the referendum in 2016 and has had some quick and sharp movements on developments since. Politics can have a direct impact on economic growth, and uncertainty in domestic politics can create a higher risk. In times of crisis when geopolitical tensions rise, safe-haven currencies can be very popular, such as the Swiss Franc, Japanese Yen, and often, the US Dollar.

If you’d like to speak to a currency specialist about moving your money abroad, please contact Global Reach on +44 (0)20 7989 0000 or visit Global Reach Group.

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