I am no expert. Below is just one hypothetical scenario. Let's say you go to a currency exchange stand to buy Euro. Euro price will be set by currency exchange stand, this price will include cost of currency stand business plus FX rates from their broker. Their brokers are probably some local small banks. Small banks will trade with larger banks like Citibank. Larger banks will trade with each other to set the FX rates. Governments will also participate in interbank market to influence FX rates. So FX rates are ultimately set up by interbank market.