What is Happening with the British Pound?!

 by Deborah Tesfamichael

Having arrived from holiday in early September, I went to exchange my US dollars for some Great British Pounds. But to my surprise I received way less than I thought I would get. This got me thinking, what is going on with the British pound?

I’ll narrow it down to two simple reasons.

The first is that we are in a current account deficit (meaning we import more than export), this means that the UK government collects less tax revenue than what it is spending (a budget deficit). To combat this, the government issues bonds, it's safe to say that investors see this as a low risk investment as government bonds have a triple A rating. However with the government recently having spent £200 billion pounds on helping people deal with the energy crisis and cutting down on taxes at the same time, investors are unsure whether the government can repay their debts. This comes at the same time where the bank of england is trying to raise interest rates to control inflation but the implementation of tax reductions are going to limit this effect (as people’s disposable incomes increase, demand for goods/services and therefore prices go up). Overall the Bank of England and government are moving in opposite directions which causes uncertainty for investors. This has resulted in many investors selling their British currency and therefore demand for the pound has decreased causing the value to decrease.

The second factor is that the US central bank is raising their interest rate to combat inflation and that’s causing a lot of people to convert their currency into dollars and invest their money in the US. This is because they’ll receive a better rate of return when it comes to saving. So we now see that the American currency is increasing in value whilst the British pound’s value is decreasing. Just a month ago, one dollar was worth £1.17 but now it’s worth only £1.09. There is a real chance that the pound might hit parity, this is when £1=$1.