Currency Exchange Rates Explained: How They Work and Impact Your Business

International trade relies on one thing above all: money changing hands across borders.
For UK businesses that import goods, pay suppliers in foreign currencies, or sell products abroad, exchange rates are a constant reality. They determine whether your invoices cost more or less this month than they did last, and they can decide if a contract is profitable or not. Even small shifts in the pound against the euro or dollar can mean thousands of pounds in extra costs. The same applies to businesses receiving payments from international customers. A stronger pound reduces the value of those receipts once they are converted back into sterling, directly affecting revenue and margins.

What Exchange Rates Actually Mean

An exchange rate is simply the price of one currency in terms of another. If the pound to euro rate is 1.15, then one pound buys €1.15. If the pound to dollar rate is 1.35, one pound buys $1.35.

Exchange rates are constantly moving because they reflect supply and demand for money across the world. Their direction is shaped by interest rates, inflation, economic growth, fiscal policy, and global sentiment.

Monetary policy is often the most immediate driver. Higher interest rates attract investors seeking better returns, which strengthens a currency. For example, when the Bank of England has held rates above those of the European Central Bank, sterling has found support against the euro. Conversely, as the US Federal Reserve prepares to cut rates aggressively, the dollar’s long-standing advantage is eroding. For detailed analysis of how Fed policy impacts currencies, see our guides to hawkish Fed signals and dovish Fed signals.

Inflation pulls the other way. When prices rise too quickly, the purchasing power of a currency falls, making it less attractive to hold. Businesses in countries like Argentina or Turkey have experienced this firsthand, with double-digit inflation leading to persistent currency weakness. Even in the UK, “sticky” inflation keeps sterling under pressure, because markets worry it undermines long-term stability.

Growth is equally critical. Strong economies attract foreign investment, lifting demand for their currency. When the UK posted 1.9 percent annualised growth in the first half of 2025, sterling briefly outperformed. But July’s flat GDP reminded markets that momentum is fragile, and the pound slipped in response.

Government budgets matter too. High deficits or talk of heavy tax rises often sap confidence. The upcoming UK November budget is already weighing on sterling as businesses and investors anticipate fiscal tightening.

Then there are the shocks. Political elections, trade disputes, and conflicts can move currencies overnight. In September 2025, drones crossing into Poland spooked European markets and sparked demand for safe-haven currencies like the dollar and yen. These events are unpredictable, but their impact on invoices and revenues is immediate.

Risks to Businesses

When currencies move the wrong way, the consequences for businesses are direct. A transaction that looked profitable on paper can quickly become a loss. A UK retailer committing to a $1 million order at GBP/USD 1.35 expects to pay around £740,700. If the pound weakens to 1.32 before payment, that order jumps to £757,576 causing a £17,000 hit to be absorbed entirely by the importer. For current GBP market analysis and political factors affecting sterling, see our latest weekly FX outlook.

Supply chains are particularly exposed. Weaker sterling inflates the cost of imported materials, from oil and machinery parts to agricultural products. Manufacturers often face higher input costs overnight, and those costs are not always easy to pass on to customers.

Exporters face a different risk. If sterling strengthens, overseas buyers suddenly find UK goods more expensive in their local currency. A British engineering firm selling equipment for £100,000 would charge €117,850 at GBP/EUR 1.1785. If the rate moves to 1.15, the same invoice costs a European customer €115,000 good news for the buyer, but potentially harmful for the seller’s competitiveness if it goes the other way.

Uncertainty is the biggest issue of all. Exchange rates that swing up and down make forecasting unreliable. Budgeting, setting prices, and planning investments all become more difficult.

At Lamera Capital, our role is to help clients manage this uncertainty. We optimise conversions by executing transactions at favourable points within the timeframe a business has available. Forwards allow us to lock in rates for future payments, giving certainty and protecting margins. For a complete guide to forward contracts and how they protect your business, see our comprehensive FX contracts guide. Where appropriate, we structure strategies that also leave room for upside gains if markets move favourably, turning volatility into an advantage rather than a threat.

Opportunities for Businesses

Currency swings are not always negative. A weaker pound can make UK exports cheaper overseas, stimulating demand. A food producer selling into Europe, for example, may find sales volumes rising when GBP/EUR drops from 1.18 to 1.14.

On the investment side, businesses holding strong currencies can buy assets abroad at attractive valuations. US companies did exactly this in 2022, acquiring European firms when the dollar was strong. UK businesses can also benefit when favourable FX moves open the door to expanding into new markets or pursuing mergers and acquisitions.

The key is timing. Those who plan ahead can seize opportunities created by volatility. Those who do not often watch them slip away.

How Businesses Can Manage FX Risk

Successful businesses approach FX risk the way they approach any other form of risk: by managing it systematically. Hedging is one of the most powerful tools. Locking in a rate today for a future payment ensures certainty. For example, a UK importer with a €2 million order due in December can agree a forward contract in September, guaranteeing the sterling cost months in advance.

Others reduce exposure by diversifying across multiple currencies and markets, so no single rate has an outsized effect. Some businesses adjust their supply chains by sourcing more materials locally, reducing the need for dollar or euro payments altogether.

Knowledge also matters. Firms that track central bank decisions, inflation data, and global events are better prepared to act quickly. A business aware of an upcoming US Fed cut, for example, may accelerate its dollar purchases before the currency weakens further.

Contracts themselves can also provide protection. Some exporters include currency adjustment clauses so that large moves do not undermine long-term deals.

How Lamera Capital Supports Businesses

Lamera Capital provides both market access and strategic guidance. Our live FX desk gives clients competitive rates and faster execution when paying overseas suppliers or receiving international revenues. That alone can deliver significant savings compared to bank spreads.

But we go further. We design FX strategies around your actual business needs — your invoice schedule, your cash flow, and your growth plans. That might mean layering hedges over different time horizons, using forwards for budgeting certainty, or setting target orders to capture key market levels automatically. The objective is always the same: protect your profitability while giving you room to benefit from favourable market moves.

Building a Strategy That Works

Managing FX is not about predicting every twist in the market. It is about putting a structure in place so that movements, whether positive or negative, do not derail your business. That structure starts with planning, continues with monitoring, and relies on expert execution.

For SMEs in particular, the first step is recognising that FX is not just background noise. It belongs alongside pricing, financing, and supply chain management as a core business consideration. Partnering with an expert provider makes it possible to manage this risk effectively without burdening your team.

Final Word

Currency exchange rates are always on the move, and their effects on your business are direct. They influence how much you pay suppliers, how much revenue you collect from overseas customers, and whether international transactions strengthen or weaken your margins.

The risks are real, but so are the opportunities. With a clear FX strategy and the right partner, you can reduce uncertainty, protect profitability, and even turn volatility into an advantage.