What Actually Moves Exchange Rates — And Why the Headlines Usually Mislead You
Business owners don't need to forecast currencies. They need to understand roughly what drives them, so they can tell the difference between noise worth ignoring and change worth responding to.
Here's the plain version.
1. Interest rates, and specifically expectations of them
This is the big one, and it's routinely misunderstood.
Capital moves toward higher returns. If UK interest rates rise relative to the US, sterling assets become more attractive and sterling tends to strengthen. Straightforward enough.
The subtlety is that markets price expectations, not events. By the time the Bank of England announces a rate rise that everyone anticipated, the move has largely already happened. Currencies react to the gap between what was expected and what occurred — and to any shift in what's expected next.
This is why sterling sometimes falls on a rate rise. The rise came, but the accompanying language suggested fewer rises to come than the market had priced. The news was good; the surprise was bad.
It's also why "the Bank of England is raising rates, so the pound will strengthen" is not a usable trading thesis. Everyone knows. It's in the price.
2. Inflation data
Inflation matters mostly because it drives the rate expectations above.
Higher-than-expected inflation implies rates staying higher for longer, which tends to support the currency in the short term. Persistently high inflation erodes purchasing power and undermines a currency over the long term.
Those two effects point in opposite directions over different horizons, which is one reason short-term currency moves so often look disconnected from the fundamentals people cite.
3. Growth and economic data
Employment figures, GDP, PMIs, retail sales. Strong data supports a currency, both directly — a stronger economy attracts investment — and indirectly, by influencing rate expectations.
Again: it's the surprise that moves things, not the level. A weak number that's less weak than forecast can strengthen a currency.
4. Politics and policy credibility
Markets tolerate policies they disagree with. They react badly to policies they can't predict, and worse to ones that appear fiscally unanchored.
The gilt market turbulence of autumn 2022 is the reference point most UK businesses remember: sterling fell sharply, not because of an economic data release, but because investors lost confidence in the fiscal framework. Elections, referendums, trade disputes and abrupt policy shifts all matter for the same reason — they change the perceived risk of holding a currency.
This is also the driver least amenable to planning. Which is the argument for hedging rather than forecasting.
5. Risk sentiment and safe havens
In periods of global stress, capital moves toward perceived safety — historically the US dollar, Swiss franc and Japanese yen — regardless of what those economies are doing.
Sterling tends to behave as a moderately risk-sensitive currency, weakening in crises even where the UK isn't the source of the trouble. Worth knowing if your exposure is GBP/USD: a global shock you have no connection to can move your costs.
What doesn't move rates as much as people assume
The trade balance. Economically important, but capital flows dwarf trade flows in day-to-day currency movements. Daily FX turnover is measured in trillions; actual trade in goods is a small fraction of that.
Most news headlines. By the time a currency story is being reported, the market has generally moved. Financial journalism explains what happened; it rarely gives you an edge on what's next.
Anyone's forecast. Bank forecasts for major pairs twelve months out have a poor record, and the banks themselves publish research acknowledging it. If you find a provider building your strategy around their rate prediction, treat that as information about the provider.
What this means practically
Don't build a business plan on a forecast. Not yours, not your broker's, not a bank's.
Do understand your own sensitivity. You don't need to know where GBP/USD is going. You need to know what happens to your margin if it moves 10% — a question you can answer today, with certainty, from your own numbers.
Watch the calendar, not the commentary. If you have a large conversion due, knowing that a central bank decision or major inflation print falls that week is genuinely useful. Executing a significant trade an hour before a Bank of England announcement is an avoidable decision.
Treat volatility as the planning assumption. Major pairs commonly move 8–10% within a calendar year. That's not a crisis scenario; it's a normal one. Build for it rather than being surprised by it.
The one-line summary
Currencies move on surprises, and surprises are by definition unforecastable.
Which is why sensible currency management isn't about predicting the market. It's about knowing what a move costs you, and deciding in advance how much of that you're willing to carry.
William Fuller, Co-Founder of Orbis Exchange Group contact on 0203 918 5622
Ben James, Co-Founder of Orbis Exchange Group contact on 0203 918 5621