Have you ever watched the EUR/USD chart and wondered, "Who decides that the Euro is worth 1.17 U.S. Dollars?" Is it a government? A central bank? Or perhaps a group of the world's biggest banks? When I first entered the trading industry, I believed currency prices simply moved because of news or technical indicators. Like many beginners, I spent countless hours studying charts, trying to understand why prices suddenly rallied or fell. Over time, I realized that behind every candlestick is a much bigger story; one driven by banks, institutions, businesses, and millions of market participants around the world. Understanding how exchange rates are determined is one of the first steps toward becoming a better trader. Let's explore how the Forex market really works.
The Forex Market Has No Central Exchange
Unlike the stock market, where shares are traded through centralized exchanges such as the New York Stock Exchange (NYSE) or the Nasdaq, the foreign exchange (Forex) market operates differently. The Forex market is an Over-the-Counter (OTC) market, meaning there is no single exchange where all currencies are bought and sold. Instead, currencies are traded electronically through a global network of financial institutions, banks, corporations, governments, brokers, and individual traders. This decentralized structure allows the Forex market to operate 24 hours a day, five days a week, making it the largest and most liquid financial market in the world.
The Interbank Market: Where Exchange Rates Begin
At the heart of the Forex market is the interbank market. The interbank market is a global network where the world's largest banks trade currencies directly with one another. Rather than one institution setting an official exchange rate, these banks continuously quote prices based on current market conditions.
Some of the major participants include:
• JPMorgan Chase
• Citi
• HSBC
• UBS
• Barclays
• Deutsche
• Bank Bank of America
Every second, these institutions submit bid prices (the price they're willing to buy a currency) and ask prices (the price they're willing to sell it). As banks compete to buy and sell currencies, their quotes constantly change. The combined activity of thousands of transactions across the interbank market forms the exchange rates that the rest of the world sees.
How Retail Traders Receive Prices
As retail traders, we don't trade directly with the interbank market. Instead, Forex brokers receive pricing from one or more liquidity providers, which are often large banks or financial institutions participating in the interbank market. Your broker then streams the best available bid and ask prices to your trading platform. This is why prices between brokers are usually very similar, although you may notice slight differences in spreads or execution depending on the broker's liquidity providers and pricing model.
Supply and Demand Drive Every Price Movement
Although banks provide the market quotes, they don't randomly change prices. Exchange rates move because of supply and demand. When demand for a currency increases, banks adjust their quotes higher. When more participants want to sell that currency than buy it, prices decline. Think of it like a popular concert ticket. If thousands of people want the ticket but only a limited number are available, the price rises. If demand disappears, prices fall. Currencies work exactly the same way, except the buyers and sellers include banks, governments, multinational corporations, hedge funds, asset managers, and retail traders.
Why Do People Buy and Sell Currencies?
Not everyone trades currencies for the same reason. Some participants exchange currencies because they need them for international business, while others are investing or managing financial risk.
Common participants include:
• Central banks implementing monetary policy
• Commercial and investment banks facilitating global transactions
• Multinational companies paying overseas suppliers or employees
• Importers and exporters exchanging foreign currencies
• Hedge funds and investment firms seeking returns
• Retail traders speculating on price movements
Every transaction adds buying or selling pressure to the market, influencing exchange rates.
Final Thoughts
Many new traders believe exchange rates are controlled by a single institution or manipulated at will. In reality, the Forex market is one of the most competitive and liquid markets in the world. Every second, countless participants, from central banks and multinational corporations to investment funds and individual traders, buy and sell currencies based on their own objectives and expectations. The exchange rate you see on your screen is simply the latest price agreed upon by that global marketplace, often referred to as the Interbank Market.
Now that you understand how exchange rates are created, the next lesson will explain why they constantly change.
➡ [Lesson 1.3 – What affects currency prices?]
Risk Warning: Trading Forex and Contracts for Difference (CFDs) involves substantial risk and may not be suitable for all investors. CFDs are leveraged products, which means both profits and losses can be magnified. This lesson is provided for educational purposes only and should not be considered financial or investment advice.
Rich is the founder of FinMarkets Asia, where he serves as the Chief Editor and financial markets educator. With extensive experience in the trading industry, he has worked with several leading brokerage firms as a Market Analyst, Trading Educator, and professional trader. Throughout his career, Rich has been committed to empowering traders through high-quality financial education, in-depth market analysis, and practical trading insights. His mission is to help aspiring and experienced traders develop the knowledge, discipline, and confidence needed to navigate today’s global financial markets.
