The pound sterling, or GBP, has historically been considered by some as a ‘safe haven’ currency. However, with uncertainty around Brexit, this is no longer necessarily the case. If you’re exchanging money to British pounds, make sure you’re fully aware of what causes the exchange rate to move and how you can help to control the risk.
Where is the pound sterling used?
The pound’s the world’s oldest currency in continuous use, and is currently official in the United Kingdom. Local issues of the sterling, at the same value as the UK one, are produced in Guernsey, Jersey, the Isle of Man and Gibraltar. Scotland, England and Northern Ireland all produce their own banknotes.
The British pound is also the fourth most-traded currency in the world, after the dollar, euro and yen. The most popular trading pairs for the pound sterling are GBP-EUR, GBP-USD and GBP-CHF.
Who regulates the British Pound?
The Bank of England (BoE), the UK’s central bank, holds overall responsibility for the pound. Its most important role is to maintain stability, such as by setting interest rates. While coins are produced by the Royal Mint, the BoE produces all banknotes in England and Wales. It also oversees the production of banknotes in Scotland and Northern Ireland by other banks.
Why is the GBP exchange rate constantly changing?
The value of the pound, and all other currencies, depends on a wide range of factors – which cause it to constantly change, as you can see in our live rates tracker. Here are some of the main ones:
Political uncertainty in the UK
Uncertainty around Brexit – and whether there will even be a deal or not – brings with it extra volatility. Conflicting statements from all involved parties can easily cause the GBP to rise or fall against the euro and dollar.
Inflation is the rate of the general price level for goods and services is increasing or decreasing by. High inflation can cause the pound’s value to drop, as goods become less competitive, meaning that demand for sterling drops.
The Consumer Price Index (CPI) and Producer’s Price Index (PPI) deviating from the BoE’s target inflation rate are both considered strong indicators of changes in policy that could significantly change exchange rates, such as GBP-EUR or GBP-USD.
If the Bank of England raises interest rates, then normally the pound will gain in value against other currencies, such as the euro and dollar. That’s because higher interest rates means greater profits for investors buying pounds – so demand for the pound grows.
The BoE’s Monetary Policy Committee (MPC) makes decisions on rates on a monthly basis, although there aren’t always changes.
If a currency seems like it’s about to rise in value – maybe because there are strong signs interest rates will be raised – then investors will buy more to make a profit later. This creates an increase in demand of its own, pushing up the British pound’s value. Equally, if it seems like it going to fall in value, they’ll sell – and that causes the value to drop.
An important tool here is the Gfk Consumer Confidence report, as well as the Nationwide Consumer Confidence Index – they help traders to know whether people are feeling optimistic or pessimistic about the economy. That can help them to predict trends or shifts.
If government debt rises to high levels, the value of the British pound can drop. This is because investors who have bought government bonds lose confidence in the UK’s ability to repay debt – so will sell in favour of a more stable investment.
Balance of payments
If Britain has a deficit, meaning that its imports are worth more than its exports, then more sterling needs to be sold (often for euros or dollars) for imports than needs to be bought from overseas for British exports. This can cause the pound sterling to drop in value, as demand for it decreases.
If British exports are worth more than imports, then the demand for sterling grows and its value will usually rise.
How does this affect me if I’m buying or selling pound sterling?
Whether you’re buying or selling, changing exchange rates can have a significant impact on the amount of money you need to pay.
Imagine that you’re purchasing a property in Europe for €200,000. In a three-day period between 5th and 8th August, the GBP-EUR exchange rate moved enough that that €200,000 price would have increased from £178,000 to £180,000. In other words, you would’ve been left looking for an extra £2,000 to spare.
The same applies if you’re buying British pounds. Perhaps you have a holiday home in Spain that you rent out when you’re not there – and you want to send the rental income to your UK bank account. Even for €1,000, you would find that you can never guarantee how much money you’ll be getting in your UK bank account. Between August 2017 and 2018, there would have been an almost-£100 difference between the highest and lowest sum you’d have received.
Buying a property abroad? Read more on how you can protect your property costs by downloading a copy of the Property Buyer’s Guide to Currency.
Is there any way to protect my money from fluctuating exchange rates?
Fortunately, there are ways you can safeguard your money. Your personal trader at Smart Currency Exchange can lock in the same exchange rate for you for up to twelve months; this is known as a forward contract. It means that you can guarantee exactly how much you’re paying – so that dream home you’ve saved up for costs no more than what you’ve budgeted for.
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