What affects exchange rates? 7 key factors for businesses
Exchange rates can affect the cost of imported goods, the value of an invoice from an overseas supplier and a company’s profit margin. For businesses making payments or receiving revenue in EUR, USD, GBP or other currencies, even a small exchange-rate movement can make a difference.
Currency markets do not move at random. Every change is shaped by a combination of economic data, central bank decisions, political developments and investor expectations. Understanding these factors will not make exchange rates fully predictable, but it can help businesses make more informed decisions about currency exchange and international payments.
Why do exchange rates matter to businesses?
For a business, an exchange rate is more than just a number on a screen. It can influence:
- the cost of imported goods, services or raw materials,
- the value of revenue received in foreign currency,
- the profitability of an agreement with an overseas partner,
- the timing of international payments,
- the stability of margins on regular cross-border transactions.
The greater the scale or frequency of currency transactions, the more important it becomes to monitor the market and include currency risk in financial planning.
1. Inflation
Inflation is one of the most important factors affecting a currency’s value. Rising prices reduce purchasing power and may weaken confidence in a country’s economy.
Central banks often respond to elevated inflation by changing interest rates. Higher rates can increase demand for a currency by making investments denominated in that currency more attractive. However, excessively high or unpredictable inflation may increase market uncertainty.
For businesses, this means that inflation data from Poland, the euro area, the United States or the United Kingdom can affect exchange rates and increase market volatility.
2. Economic performance and macroeconomic data
Investors closely follow economic data that reflects the condition of an economy. Key indicators include:
- GDP growth,
- employment data,
- industrial production,
- retail sales,
- business activity indicators such as PMI.
Strong data can signal that an economy is developing steadily. This may attract foreign capital and support the country’s currency. Weaker-than-expected results, on the other hand, may put pressure on it.
Which data releases can move exchange rates?
Markets react not only to the data itself, but also to whether it is better or worse than expected. A result can be positive in absolute terms yet still weaken a currency if investors had expected an even stronger reading.
3. Central bank decisions and interest rates
Central bank decisions are among the most important events in the currency market. This includes decisions made by the National Bank of Poland, the European Central Bank, the US Federal Reserve and the Bank of England.
Interest rates affect how attractive a currency is to investors. A rate increase may support a currency, while a rate cut may weaken it. However, markets do not always wait for the decision itself.
Why does central bank communication matter?
Statements, forecasts and guidance about future monetary policy can move exchange rates before any official interest-rate change takes place. Often, it is the market’s expectations about future decisions that drive the strongest reaction.
4. Trade balance and capital flows
A country’s foreign trade can also affect its currency. When exports exceed imports, overseas buyers may need more of the local currency to pay for goods and services. This can increase demand for the currency and support its value.
Capital flows matter as well. Foreign direct investment, bond purchases and portfolio investment can all increase demand for a country’s currency.
This can be especially relevant for businesses trading in currencies linked to export-driven economies, commodity markets or strong cross-border investment activity.
5. Government policy and public finances
Government decisions can influence how investors view a country’s economic stability. Markets monitor factors such as public debt, budget deficits, tax policy and regulations affecting businesses and investment.
A growing deficit, high debt or uncertainty about the direction of economic policy can make investors more cautious. As a result, the country’s currency may come under pressure.
It is not only individual policy decisions that matter. Predictability and confidence in the stability of a country’s public finances are equally important.
6. Geopolitics, global events and commodity prices
Wars, trade disputes, economic crises and political tensions can quickly increase uncertainty in financial markets. During periods of heightened risk, investors often move towards assets considered safer, which can affect currencies such as the US dollar or Swiss franc.
Commodity prices may also influence certain currencies, particularly in countries whose economies depend heavily on the export of oil, gas, metals or other raw materials.
For businesses, this means that global events can affect currency markets even when they do not directly involve the country whose currency is being exchanged.
7. Market sentiment, public statements and investor expectations
Currency markets do not respond only to hard data. Investor sentiment, media headlines, forecasts and statements from policymakers can all influence short-term movements.
A comment from a central bank governor, finance minister or government representative can move a currency if markets interpret it as a signal of future policy changes. Sometimes, communication itself has a greater impact than the decision that follows.
In the short term, exchange rates can therefore become more volatile, particularly when markets react emotionally or when published data differs significantly from expectations.
How can businesses respond to exchange-rate movements?
It is not possible to eliminate every factor affecting currency markets. However, businesses can prepare more effectively for exchange-rate volatility.
It is worth:
- monitoring major economic events and central bank announcements,
- tracking the exchange rates that matter to the business,
- planning international payments in advance,
- using exchange-rate alerts,
- considering exchange-rate protection for larger or regular commercial transactions.
At AFORTI.BIZ, businesses can follow key market developments in the Market Insights section, including the Market Report and Market Pulse. Companies carrying out commercial transactions can also explore exchange-rate protection through the Term service.
Summary
Exchange rates are shaped by many interconnected factors – from inflation and interest rates to economic data, geopolitics and investor sentiment. This is why it is worth looking beyond the current rate alone.
For businesses operating in foreign currencies, understanding what can move the market supports better payment planning, margin management and more informed financial decisions.
This material is provided for educational and informational purposes only. It does not constitute investment advice or a recommendation to enter into any transaction.