The value of the pound dropped sharply after the EU referendum, and has been fluctuating since. It affects everyone. From holidaymakers and those filling up their cars with petrol, to business owners and investors.So why is the value of the pound changing and who decides its value? Moolr took a look, and examined the effects of a weakening pound.
When people talk about the pound falling or rising, or being strong or weak, that means it will buy more or less of a foreign currency because the exchange rate has altered. Commonly, the pound is compared to the US dollar, given the huge size of the American economy. For those going on holiday, their only comparison will be with the currency in their holiday destination. The euro is of course a common currency for comparison.
Today, many countries use what is called a floating exchange rate. With this system, the value depends on how much people want a certain currency at a particular point in time. Exchange rates change constantly. They reflect the constantly changing demand for every currency worldwide.
Sterling hit its lowest level in 2 and a half years at $1.2101 against the dollar in July 2019. In a similar vein, the currency’s value also fell against the euro, reaching €1.0881 at its nadir. For comparison, sterling was trading at just below $1.50 against the dollar before Britain voted to leave the EU in June 2016.
The value of sterling has continued to fall, as the government insists the UK is prepared to leave the EU without a deal. If a deal can be arranged for an exit, expect the pound to rally. A no-deal exit will only worsen the situation.
Supply and demand for sterling determines the exchange rate of the pound.If demand for sterling goes up, then its price will too.
There are many factors involved here, which include the following:
Much of the daily fluctuation in the exchange rate is because of these actions of the speculators and their confidence in the country’s economic prospects. Or lack of confidence.
The obvious consequence of a weak pound has been felt by all of us who have holidayed or travelled abroad in recent times. Quite simply, you get less bang for your buck. You get lower amounts of foreign currency, so even if the destination has not seen any inflation, you will have less money to spend.