This is the price of a currency expressed in terms of another currency e.g. £1 will buy $1.65.
The diagram illustrates how an exchange rate is determined by the demand (generated by exports because foreign countries need the currency to purchase the domestic country's exports) and supply of the home currency (this happens because the domestic currency is supplied to acquire foreign currencies so that imports can be purchased) on the foreign exchange market. Demand and supply is generated by financial as well as physical transactions.
In this example at the point where Qd = Qs the exchange rate is ER. In modern times circa $5 trillion is traded every 24 hours. This means any imbalances in demand and supply produce almost immediate exchange rate adjustments so that the market continuously clears. As a result exchange rates are quite volatile and adjust quickly to changes in demand and supply. It should be appreciated that the majority of foreign currency transactions relate to financial transactions (approx 2/3) rather than trade in goods and services.