Foreign currency matters

What factors can affect the Pound on the currency markets?

Posted by Barbara Sutton


Wed 20th, May

If your company is involved in foreign exchange transactions, you will know that the more help you get the more profit you can make.

It is important to understand that all currencies can be affected by the same underlying economic factors, which are:

 Monetary Policy

 Inflation

 Confidence & Sentiment

 Growth

Using these 4 general factors above you can start to make an informed evaluation of the strength or weakness of a currency and what direction that currency is likely to move, up or down. Using GBP as an example.

Monetary Policy: The Bank of England (BOE) will increase or decrease interest rates to control inflation. If there is low inflation (growth in the economy is shrinking) they will lower interest rates to stimulate growth resulting in cheaper loans and people start spending etc. If on the other hand inflation is too high, the BOE will raise interest rates to bring inflation back down to the 2% BOE target. When interest rates rise the GBP exchange rate will rise, and vice versa, any decisions on interest rates by the BOE can and in most cases will affect the Pound.

Inflation: Inflation plays a crucial role in the value of the Pound. In general, countries with higher inflation compared to that of other countries will see their currency value depreciate. To gauge the levels of inflation in the UK you can follow the Consumer Price Index (CPI) and changes in the prices of goods & services purchased by consumers in a given period, and the Producer’s Price Index (PPI) which shows inflationary changes in raw materials.

Confidence & Sentiment: These are surveys that gauge the market on how the majority of people in the UK are feeling about the economy. Gfk Consumer Confidence and National Consumer Confidence are the two main numbers to review and monitor, more information can be found at:

Growth: The overall level of economic activity in the UK is another key factor that can impact Sterling’s value. The primary measure is Gross Domestic Product (GDP), essentially the value of what the UK produces. Many will supplement this report with more frequent economic indicators such as Retails Sales and the Manufacturing Purchasing Managers Index (PMI) which is an economic indicator derived from monthly surveys of private sector companies. Generally the better a countries GDP figure the stronger its currency will be. Finally it’s good to watch the UK’s Current Account which shows how much the UK is importing (buying) and exporting (selling) and the differences between them. In general a Current Account surplus is positive for GBP, the more money flowing into a currency initiates a rise and a deficit is negative for the Pound for the opposite reason.

During the last UK election in May 2010 the Pound against the US Dollar was at $1.54 on 27th April and dropped to $1.44 just 10 days later. If history repeats itself you can expect there to be some volatility for Sterling against the US Dollar and Euro as well as other currencies before and after the election.

Looking ahead the Pound may have a bumpy ride with the looming general election and a possibility of a hung parliament, continued quantitative easing in Europe and with the added possibility of a Greek exit (Grexit) as well as a number of other factors both known and unknown.

For further information you can get daily and weekly market updates by email, just subscribe here  


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