The GBP to USD Exchange Rate: Making Sense of Dollars and Pounds

  • Posted by Paul on September 24, 2014 in Global Economies

The GBP to USD exchange rate is a complicated beast. There are a wide range of factors that will have an effect on the two currencies generally and relative to each other over the long term. Changes in interest rates, political friction and the general risk appetite of currency investors, are all things that can exert pressure on the currencies and on the markets in general.

GBP, USD, Exchange Rates

The Domestic Economy

Economic growth is obviously another factor that can cause one to suffer against the other. In situations where the American economy is suffering but the United Kingdom is experiencing growth, then you can expect the relative position of the Sterling to improve against the USD. Inflation in one or other economy, may put pressure on monetary regulators to increase exchange rates – this means that holding the currency becomes more attractive, as people can get higher returns on their deposits. This will generally also result in a commensurate increase in value of the currency.

The USD/GBP exchange rate has seen some fluctuations recently, generally to the advantage of the USD. The reasons behind this correction have a lot to do with the end of quantitative easing being on the horizon stateside and the fact that the Federal Reserve is very likely to take action around the raising of interest rates in order to curb economic problems that could arise from their changes to the money supply within the economy.

It goes beyond just the States and the UK

It’s not only the relationship directly between the two countries that can have an impact on the value of a currency. Even in a situation where one is stronger than the other, there may be a lot of internal political turmoil or general instability globally, which is likely to have an impact on the economy.

In situations such as this, foreign exchange speculators and investors may decide that it is prudent to take safe haven in another entirely unrelated currency such as the Yen. If a substantial amount of Pounds or Dollars are exchanged for a “safe haven” currency, then a reduction in value of the originating currency can be expected. This will also be commensurate with an increase in price for the target currency.

The reality is, when it comes to predicting what is going to cause exchange rate fluctuations, the USD/GBP have a complicated relationship. Political instability, terrorism, wars and economic problems within each economy can have a serious impact on the value of their monetary instruments. The relationship is further complicated by the fact that the two economies are so intricately intertwined, which can mean that something occurring in one economy can also very easily have an impact on the other (consider the operations of large multinationals which operate in both the UK and US markets).

There is no way to be 100% accurate in predicting how a currency is going to perform from one day to the next, but by being aware of what has caused fluctuations in the past and keeping abreast of current affairs is a good way to make an educated guess.

 

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