Guide to What Affects The Pound Exchange Rate

If you’ve ever bought or sold the pound, you’ll know that the toughest part of doing so is knowing when’s the best time to exchange currencies. Alas, no one can predict the foreign exchange rate.

Given that, what I want to do in this post is provide a guide as to what has the biggest impact on sterling. This way, you can gain a better insight into what affects the pound, even if you can’t know for sure how the exchange rate will change.

What affects the pound exchange rate?

The pound exchange rate is broadly affected by two things. These are economic and political events in the UK, and economic and political events outside the UK. This is because, of course, the value of the pound will be affected by things inside Britain.

However, if you want to sell the pound to buy the euro for instance, then your exchange rate will also be impacted by what’s happening in the Eurozone. The same for the US dollar, and what’s happening in America, etc.

What sort of economic and political events do you mean?

In the UK, there’s a monthly economic calendar detailing what’s happening in different parts of the UK economy. This includes the performance of the UK’s manufacturing sector at the start of the month, the unemployment rate toward the middle of the month, the trade balance at the end, and so on.

Each release adds to the ongoing picture of what’s happening in the UK economy, and so affects the value of the pound.

In addition to the UK economic outlook, the political picture is changing at the same time. For instance, the prime minister UK might decide to take the country to war or bring the UK out of the European Union.

These things have implications for how attractive the UK is as an investment destination, and so also impact the pound exchange rate.

Do you have any examples of politics affecting the pound?

Well, the uncertainty surrounding the UK’s future membership of the EU right now is a good example of politics affecting the pound. The pound is arguably lower than it otherwise would be because this doubt exists. This is because, for many investors, one of the key benefits of the UK as an investment destination is that it provides access to the European market, but in English.

If the UK leaves the EU, it no longer provides that access but stands on its own as a much smaller market.

Do you have any examples of economics affecting the pound?

The pound is down almost an entire penny against the euro today, as economic forecast group NIESR predicts the UK will contract –0.3% in the last three months of 2012.

Of course, this is just a prediction, and we won’t know the actual result until two weeks from now. But if this is accurate, it means the UK is on the way to an unprecedented triple-dip recession, meaning the UK has fallen into recession three times since the financial crash.

Which releases have the biggest impact on sterling?

If I knew this, I’d know which way the pound was going to go, and could predict the exchange rate. However, speaking very generally, figures about whether the UK economy is expanding or shrinking will have a big impact on the pound, as will major political announcements.

For example, were the UK to leave the EU, it would blow the pound apart like an earthquake, to be sure. In addition, market expectations also play a big part in where the pound will go.

For instance, if the UK is expected to shrink but –0.5%, but only shrinks –0.1%, the pound could climb even though the news is bad because it’s not as bad as feared.

How can I find out what economic releases are due?

To do that, I’ve put together a calendar of the UK’s monthly economic releases. UK Monthly Economic Calendar

Is there anything else to keep in mind?

If you plan to buy or sell the pound, I think the most important thing to keep in mind is that the foreign exchange market is volatile and subject to sudden changes. This reflects the fact that the world is a fast-changing place.

For instance, who’d have thought five years ago that the UK would still be battling recession today? And who’d have thought two years ago the country would be contemplating leaving the EU? Hence, even armed with a calendar, and a better idea about what affects the rates, your best bet is still to tread cautiously when thinking about the rates.