Factors Influencing Foreign Exchange Rates

This article discusses the economic factors that influence foreign exchange rates, such as inflation rates, interest rates, balance of payments, terms of trade, economic performance, stability of political climate, and speculations. It also explains how the level of demand for currency affects the price of the market. The article provides a graph showing the exchange rate of a single GBP to Euros monthly up to September 2019 and concludes with a discussion on the expected rise of GBP in relation to Euro in the coming months.

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Introduction
Foreign Exchange rate is considered to be among the most vital means in which the
economic status of the country can be determined. The term Exchange rate refers to the rate
through which the country’s currency can be changed in relation to another (Twin, 2019).
However, exchange rate fluctuates daily due to differences invisible forces of demand and
supply about the currencies of one country to another.
Economic factors that influence the Foreign Exchange Rates
Inflation rates; the change in inflation leads to change in rate of exchanging the currency.
It is believed that a country with low rate of inflation than other countries gains the value of their
currencies (Albertijn et al, 2011) This is because the prices of the products in the country rises
at a slower rate where there is low inflation.
Interest rates; the change in interest rate of the country influences the value of currency
and the rate of Euro exchange. It is evident that the rate of foreign exchange, interest rates and
inflation are linearly correlated. Besides, when interest rates increase, the country’s currency
gains since lenders prefer higher rates. Thus, leading to increased foreign capital that rises the
exchange rate
Balance of payments; the Balance of payments reflects the earnings about foreign
investments. This costs of the level of transactions in form of exports, debt and imports. Most
important is that, B.O.P changes rate of exchange of the county’s local currency. In addition,
‘public debt’ also affects foreign exchange rate of the country’s currency. The country with high
rates of debts acquire low foreign capital thus predicting low rates of foreign exchange (Albertijn
et al, 2011). More so, terms of trade affect foreign rate of exchange of the economy. The
country’s ‘terms of trade’ affects positively when the exports price increases more than the price
of imports. In addition, economic performance and stability of political climate affects the foreign
exchange rates of economies’ currencies (Suresh, 2013). The country which possess the
booming financial and trade policies increases its value of the currency. Moreover, speculations
also affect the country’s foreign exchange rate. When the country’s currency is anticipated to
rise, most investors are likely to demand more currency for the purpose of making profits in the
sooner future. In this case, the currency’s value can rise due to the shift of demand outwards.

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Level of Foreign Exchange rate
The level of demand for the currency affects the price of the market. It is evident that if
there are many people in need to buy the currency in euro than selling it, the currency’s value is
likely to go high (Raghavendra & Velmurugan, 2014). On the other hand, when there are more
sellers than buyers of the currency in euro, the domestic currency that is to say exchange rate
of Euro is likely to go down.
Figure 1: Exchange rate from GBP to EURO
Source: Bloomberg terminal, 2019
Figure 1 shows the exchange rate of a single GBP to Euros monthly up to September
2019. The exchange rate in January was 1.1198, the exchange rate further showed the
increase from January to march. However, March to August there was a drastic fall in exchange
rate in GBP single value in relation to Euro exchange. Such trend of foreign exchange rate
depicts a cyclical movement which cannot be tamed. However, due to the change of rates by
considering the fluctuation per month, it is believed that in next two or more months, the foreign
exchange rate of GBP is believed to increase drastically in relation to the Euro rates.
The bad thing of accounting errors on foreign currency transactions are found with the
important volatility as the value of GBP is concerned in relation to other currencies. In last 18
months, volatility is more likely to continue especially yen’s spiking due to the disastrous
earthquake in March (Ward et al, 2019). Also, countries with hyperinflation are more likely to

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face the low value of currencies thus achieving low rates of foreign exchange from their local
currencies.
Conclusion
In conclusion, it is believed that the rate at which the rate of GBP is expected to rise in
relation to Euro in coming months. Basing on the Australia’s context, the inflation rates are
economically stable (that is below 3%) which increases the value of foreign exchange capital,
thus improving on the foreign exchange rates of the country. In addition, the stable political
climate of the country is likely to influence more foreign investors in different fields, thus
increasing the value of foreign exchange.

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References
Albertijn, S., Bessler, W. and Drobetz, W. 2011. Financing shipping companies and shipping
operations: A risk-management perspective. Journal of Applied Corporate Finance, Vol. 23(4),
pp. 73-82.
Raghavendra, R.H & Velmurugan, P.S.2014. The Determinants of Currency Hedging in IT
Firms. Journal of Business & Financial Affairs. Retrieved from:
https://www.omicsonline.org/peer-reviewed/the-determinants-of-currency-hedging-in-indian-it-
firms-38743.html
Suresh A.S . 2013. A Study On Fundamental And Technical Analysis
International Journal of Marketing, Financial Services & Management Research ISSN 2277-
3622, Vol.2, No. 5.
Twin, A. 2019. 6 Factors That Influence Exchange Rates. Retrieved from:
https://www.investopedia.com/trading/factors-influence-exchange-rates/
Ward, D.J., Sutton,C.P., Werner, D.A., Costanza,R. et al, 2019. Is Decoupling GDP Growth
from Environmental Impact Possible?. Retrieved from: https://journals.plos.org/plosone/article?
id=10.1371/journal.pone.0164733