From Brexit To Fed Policy: Factors Influencing The Great British Pound And US Dollar Exchange Rates
The GBP/USD exchange rate orbits around several economic dynamics. A recent Federal Reserve Bank of New York analysis affirmed that approximately 90% of international traders invoice their trades in Euros and US dollars. Also, central banks allocate about 80% of foreign exchange reserves to the euro and dollar.
The two carry monumental value in the global exchange system, and understanding their impact on other currencies is imperative. So, which factors influence the exchange rates of the US dollar and the Great British Pound? Read on to find out.
1. Brexit Developments
The strength and exchange rate of the Great Britain Pound vs the US Dollar depend on the Brexit developments. Brexit negotiations, including regulatory frameworks and agreements on trade deals, boost investor confidence and impact the fluctuations in exchange rates. More confident traders invest more, which improves the UK economy and strengthens GBP against the US dollar.
Unsettled trade agreements and regulatory changes from Brexit have negative economic implications. These setbacks create uncertainty about future relations between the EU, the UK, and other trading partners. Ultimately, it forces investors to seek safer alternatives, including the USD, leading to GBP value depreciation. These changes and trade agreements affect other segments of the economy, ultimately affecting the exchange rate between the two currencies.
2. Economic Data Releases
Countries and trade unions release economic data, influencing currency and market sentiment valuation. Data releases showcasing stronger GDP or US dollar trigger positive perceptions about the strength of the UK and US economies. Stronger economies by either country showcase the financial muscle and can affect the exchange rates you get.
Central banks reference inflation targets when creating financial policy decisions. Heightened inflation rates can cause the central bank to increase interest rates, leading to currency appreciation. Lower inflation rates often cause depreciated currency rates. The employment figures also affect the rate of the two currencies. Lower rates of unemployment indicate a strong economy and higher consumer spending habits. Positive employment figures boost investor confidence and currency.
Trade surplus strengthens the currency of each country. It shows services and goods are in high demand. Also, a trade deficit weakens the currency and can affect USD and GBP exchange rates.
3. Central Bank Communication
Information from banks has a significant impact on currency markets. Banks communicate interest rate expectations often, providing clues about future interest rates. Speeches and statements released by central bank officials are economic indicators. High interest-rate spikes exhibit growing demand for US and GBP currencies. Central banks offer guidance on financial inflation targets, policy stance, and the economic outlook.
Accurate information from policy objectives impacts market expectations. Conflicting signals affect the current market volatility. Central bank updates impact risk appetite and investor sentiment. They assess economic conditions and showcase the commitment of the central bank to stabilize economies and trigger economic growth. Central banks use Forward Guidance and quantitative measures to affect economic conditions.
4. Political Stability
Political stability in the UK and the US influenced the US dollar and the exchange rates in Great Britain. For instance, referendums and general elections make the political scene uncertain. Political ideology and government leadership changes cause policy uncertainties. These political waves impact currency valuations and investor confidence. In many instances, when the US and UK hold presidential elections, the USD/GBP exchange rates reduce.
Fiscal management, trade, and taxation policies impact investor sentiments and economic conditions. Consistent and clear policy directions support currency strength and investor confidence. Also, geopolitical events cause uncertainties and make investors unable to invest. Diplomatic tensions, conflicts, and trade disputes affect the currency strengths of the currencies. The USD dollar becomes stronger during periods of geopolitical instability.
5. Global Trade Dynamics
Global trade dynamics are another factor impacting the strength of the USD and GBP. Trade dynamics keep changing, affecting investor sentiments and currency strengths. Trade tariffs and agreements impact the flow of services and goods between diverse companies. The imposition of new tariffs and negotiation of new trade deals impact import and export volumes. These tariffs and agreements cause changes in the US and UK currency valuations and market sentiments.
Trade balances between the US and the UK and their trade relations with relevant countries impact currency valuations. Remember, a trade surplus has a positive impact on currency strength. Trade deficit weakens the currency value and investor perceptions. Changing global trade dynamics impact production costs and supply chains. These can impact currency value and economic growth. Disrupted supply chains affect the profits generated by businesses and investor sentiment.
Wrapping Up
Many things, directly and indirectly, impact the exchange rate between the Great British Pound and the US dollar. All these factors impact investor sentiments and currency valuations. Market dynamics affect trading agreements and tariffs while impacting currency markets.
Central bank policies and Brexit fluctuations impact the trade rate of the two currencies. Also, geopolitical tensions and economic data releases affect the dollar and the pound exchange rates. Investors and traders usually analyze these developments and trends to make informed decisions.
