What Are Exchange Rates?
In the Guide to Forex 2026, exchange rates are one of the first and most important ideas you need to understand.
An exchange rate simply tells you how much one currency is worth compared to another currency.
Think of it like trading toys:
- If 1 toy car can be traded for 2 candy bars
- then the exchange rate is 1 toy = 2 candies.
In Forex, we trade money instead of toys.
How Exchange Rates Work
Exchange rates are always shown in pairs, such as:
- EUR/USD
- GBP/JPY
The first currency is called the base currency.
The second currency is called the quote currency.
The exchange rate shows how much of the second currency is needed to buy one unit of the first currency.
👉 Example:
If EUR/USD = 1.20, it means:
1 Euro = 1.20 US Dollars
Types of Exchange Rates
In the Guide to Forex 2026, exchange rates are divided into two simple types.
Floating Exchange Rates
Floating exchange rates move up and down freely.
They change all the time based on:
- buying and selling
- news
- the economy
Most major currencies use floating exchange rates.
Fixed Exchange Rates
Fixed exchange rates are controlled by a country’s central bank.
The value stays the same unless the government decides to change it.
What Makes Exchange Rates Change?
Many things can push exchange rates up or down. Here are the main ones explained simply.
Interest Rates
Higher interest rates often attract more investors.
More investors means more demand for the currency, so its value goes up.
Inflation
When prices rise too fast, money loses its buying power.
This usually makes the currency weaker.
Political Stability
Countries that are calm and stable feel safer to investors.
Safe countries often have stronger currencies.
Economic Growth
A growing economy creates jobs and business.
This usually increases demand for the country’s currency.
Speculation
Some traders buy and sell quickly to make short-term profits.
This can cause fast and big price changes.
Trade Balance
If a country sells more goods than it buys, its currency may rise.
If it buys more than it sells, its currency may fall.
Government Debt
Too much debt can scare investors.
Fear often leads to currency weakness.
Central Bank Actions
Central banks can buy or sell their own currency to control its value.
Commodity Prices
Countries that sell oil, gold, or gas can see their currency change when commodity prices change.
Global Economic Events
World events like recessions or crises can push money into “safe” currencies.
Why Exchange Rates Matter in Forex
In the Guide to Forex 2026, exchange rates are the heart of Forex trading.
Every trade is based on how currencies move against each other.
Understanding exchange rates helps beginners:
- avoid confusion
- manage risk
- trade smarter instead of guessing
