The UK is highly exposed to gas prices and inflation and the pound has been on the back-foot since the Russian invasion of Ukraine.
The GBP/USD rate, also known as the “cable” in financial circles, is the exchange rate between the British pound and the US dollar. There are several things that are interesting about this currency pair, including:
Despite the UK’s narrowly avoiding a technical recession and the resolution of the Northern Ireland protocol with the “Windsor Framework,” the pound is slightly down after an impressive US Jobs Report boosted the US dollar value. GBP/USD traded in a relatively narrow range throughout most of February, hovering around US$1.20. Q4 2022’s GDP reading came in flat, meaning the UK narrowly dodged a technical recession.
However, growth for the year is expected to be subdued. The services sector exceeded expectations, hitting 53.3, well into expansionary territory, as well as a strong retail sales number. Recent comments from Bank of England Governor Andrew Bailey seemed to cast further rate hikes from the BoE into doubt, but markets are still expecting another hike on March 23rd. GBP/EUR traded between US$1.1150 and US$1.1420 throughout the month.
The pound hit an all-time low (since decimalization in 1971) in late September 2022 of 1.03 against the greenback (1 USD = 0.97 GBP) — reacting to the controversial tax-cutting policies from the new chancellor.
Whether the British pound will rise or fall in the future is a difficult question and the answer really depends on many factors. The best way to consider an exchange rate’s relative value is to look at the rate’s history against a range of currencies and in particular against the GBP cross-rate you are interested in.
Interest rates: Higher interest rates tend to attract more foreign capital, which can increase demand for the pound and lead to appreciation of the currency.
Economic growth: A strong economy can lead to increased demand for the pound, as investors and traders seek to take advantage of the country’s favorable economic conditions.
Inflation: Low and stable inflation can help to support the value of the pound, as it suggests that the central bank is effectively managing the money supply and maintaining price stability.
Government debt: Large government debt can be seen as a burden on the economy and can lead to concerns about the country’s ability to service its debt, which can weigh on the value of the pound.
Political stability: Political stability can help to create a favorable environment for investment, which can increase demand for the pound.
Trade balances: A trade deficit (where a country imports more goods and services than it exports) can lead to a decrease in demand for the pound, as foreign countries have fewer pounds to reinvest in the country. Conversely, a trade surplus can lead to an increase in demand for the pound.
Exchange rate policy: The Bank of England, the central bank of the UK, has a history of actively managing the exchange rate of the pound in order to maintain competitiveness and stability in the foreign exchange market.
Disclaimer: Please note any provider recommendations, currency forecasts or any opinions of our authors should not be taken as a reference to buy or sell any financial product.