What are exchange rates?

An exchange rate tells you how much of a country's currency you could buy
for each unit of another currency. For this reason, exchange rates are
expressed as currency pairs.
One of the most commonly quoted currency pairs is GBP/USD - the British
pound and the US dollar.
If the market rate for GBP/USD is 1.25, for example, you'd get US$1.25 for
each £1 you exchange (assuming you get the market rate, and excluding any
fees).
You can flip the equation. So, at the same time, the USD/GBP rate might be
0.80, meaning you'd get £0.80 for each US$1 you exchange.
The rate can make a big difference to the amount you get from a currency
exchange. In the 18 months between 1 January 2018 and 1 July 2019, £1 was
worth US$1.42 at its highest and US$1.22 at its lowest. That's a difference of
US$200 for every £1,000 exchanged at the market rate:
 GBP/USD exchange rate = 1.42:
£1,000 = US$1,420
 GBP/USD exchange rate = 1.22:
£1,000 = US$1,220

What drives demand for a currency?

As well as moving or travelling abroad, common reasons to exchange
currencies include paying mortgages, funding a child's education, or preparing
for retirement overseas.
But currencies are exchanged on a much greater scale for other reasons,
including trade - buying goods and services from another country - and
investment.
The rising value of a country's currency versus others may be an indicator of
improving economic health. Or at least the prospect of it. If GBP is rising
against the USD, for example, it's in higher demand at that time.
Below are some of the key influences on exchange rate movements.
Interest rates and inflation
Inflation and interest rates are closely related, and both affect exchange rates.
Some inflation - rising prices of goods and services - is healthy for an
economy, as it shows increasing demand versus supply. But too much
inflation can be a problem, as goods and services become less affordable.
Central banks consider this balance when setting interest rates. For example,
the Bank of England has an inflation target of 2%, as of 22 May 2020.
If inflation is below its target level, a central bank may look to cut interest
rates. Lower interest rates make it cheaper to borrow, and less rewarding to
save, which encourages people to spend. That increase in demand can push
inflation higher.
But if inflation is rising too fast, a central bank may increase interest rates,
aiming for the opposite effect. Higher rates can make it more expensive to
borrow, and more rewarding to save, reducing demand and slowing inflation.
Higher interest rates can increase a currency's value. They can attract more
overseas investment, which means more money coming into a country and
higher demand for the currency.
Trade
A country's trading relationship with the rest of the world can also affect its
currency. Countries that export more than they import - known as a trade
surplus - will typically have stronger currencies than those with trade deficits.
If businesses outside the UK buy goods and services from the UK, for
example, they'll typically pay for them in pounds. The more a country exports,
the higher the demand for its currency will be.
Market expectations
Market expectations - taking into account the above factors - play a big part in
exchange rate fluctuations.
But an unexpected interest rate cut, or increase, could have a more
pronounced effect on exchange rates.
The Bank of England holds regular Monetary Policy Committee meetings,
where it decides whether to raise, cut, or leave rates unchanged. Similarly, in
the US, the Federal Open Market Committee (FOMC) holds regular meetings
to discuss monetary policy, including interest rates.
 Bank of England Monetary
Policy Committee dates
2020Bank of England Monetary
Policy Committee dates 2020
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 US Federal Reserve monetary
policy meeting dates 2020US
Federal Reserve monetary
policy meeting dates 2020 This
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Other economic data, such as Gross Domestic Product (GDP) and
unemployment rates, will also affect market expectations.
The stability of a country - economic and political - does too. The outcome of
an election, could have a significant impact on a country's currency, if the
market expects it to result in faster or slower economic growth.

How to manage currencies

If you're managing money across multiple currencies, it helps to stay up to
date with currency movements.
HSBC's FX app gives you access to live market updates and historical rates.
It also lets you trade currencies and set up limit orders - that's where you
name the rate you want, and the trade happens as soon as that rate is
available.