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Behavioral strategies employed for chemotaxis have been described across phyla, but the sensorimotor basis of this phenomenon has seldom been studied in naturalistic contexts. Here, we examine how signals experienced during free olfactory behaviors are processed by first-order olfactory sensory neurons (OSNs) of the Drosophila larva. We find that OSNs can act as differentiators that transiently normalize stimulus intensity—a property potentially derived from a combination of integral feedback and feed-forward regulation of olfactory transduction. In olfactory virtual reality experiments, we report that high activity levels of the OSN suppress turning, whereas low activity levels facilitate turning. Using a generalized linear model, we explain how peripheral encoding of olfactory stimuli modulates the probability of switching from a run to a turn. Our work clarifies the link between computations carried out at the sensory periphery and action selection underlying navigation in odor gradients.