Home / Course / Module 2 / What Moves Currencies: Rates, Inflation, Growth and Sentiment
Module 2 · Lesson 6 of 7Exchange rates move because the relative appeal of one currency against another changes. This lesson covers the main drivers and how to think about them in pairs.
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A currency has no fixed value. It is priced against another, so what matters is how one economy looks compared with another. If the UK looks relatively more attractive than the eurozone, GBPEUR tends to rise. If both look equally attractive, little changes.
Think of a race between two runners. It does not matter that one runner is fast: what matters is whether they are faster than the other. Currency moves are the market's running assessment of that race.
The drivers below are not a formula. They interact, they change in importance over time, and markets often move on expectations of the future rather than what has already happened.
A central bank (such as the Bank of England or the European Central Bank) sets a policy interest rate. Higher rates tend to attract money seeking a better return, because holding that currency pays more. That extra demand can lift the currency.
What really matters is expected rates relative to other countries. If markets expect the Bank of England to raise rates while the European Central Bank holds steady, sterling may strengthen against the euro in advance, even before any decision.
Central banks also communicate through speeches and meeting minutes, and a change of tone (more 'hawkish', leaning to higher rates, or more 'dovish', leaning to lower rates) can move prices. Gold and the dollar's link to rates is explained in What Moves Gold Prices.
Currencies respond to the gap between expected interest rates in two economies, not to the level of one rate on its own.
Regular data releases (inflation, jobs, growth, retail sales) feed these views. You will learn how to follow them in the Reading Markets module later in the course.
Market sentiment is the general mood of investors. In risk-on periods, investors feel confident and favour assets that can grow, which can include higher yielding or commodity-linked currencies such as the Australian dollar. In risk-off periods, fear rises and money tends to move to perceived safe havens.
The Japanese yen, the Swiss franc and the US dollar are often described as havens, as is gold. This is a tendency, not a rule: relationships can break down, and the same event can push the same currency in different directions at different times.
Markets are forward looking, so a figure that is 'good' may still push a currency down if it was worse than what traders had already priced in. What matters is the gap between the actual release and the forecast (the consensus expectation).
This is only an illustration of logic. Real reactions are not guaranteed, and prices can move the opposite way to the textbook expectation.
| Driver | Typical direction (tendency only) |
|---|---|
| Rising rate expectations | Supports the currency |
| Weak growth data | Often weighs on the currency |
| Risk-off fear | Often supports havens, weighs on risk currencies |
| Political uncertainty | Often weighs on the affected currency |
No single driver explains a move. Anyone claiming to predict currencies with certainty is overstating what is possible. Sessions matter too: see Forex Sessions and Liquidity.
Real moves usually involve several drivers pulling at once. This purely illustrative scenario shows how to reason, not what will happen.
The structure matters more than the example: identify the driver, compare it between two economies, ask what was expected, and consider the mood of the market. Then accept that the outcome is uncertain.
Not reliably. Markets price in expectations, reactions vary, and many factors act at once. News helps you understand context and risk, not forecast with certainty.
It often behaves that way in stress, but it is not guaranteed. The relationship changes depending on the cause of the stress.
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