The exchange rate of the British Pound (GBP) against the US Dollar (USD) is up significantly from this time last year. This has been a concern for investors, since currency exchange rates affect the value of the currencies that are transacted in global commerce. Exchanges are important to most multinational companies as they determine the prices that are charged for goods.
There are several reasons that investors are concerned about the exchange rate of the British Pound (GBP). They are worried that the exchange rate will continue to rise, even as consumer prices remain stable.
Although the British Pound (GBP) has climbed higher against the USD in recent weeks, there is a concern that it is not going to go much higher. This is because the British economy has remained slow, thus forcing the Bank of England to spend more money on money market operations to reduce the liquidity and stimulate economic activity.
The latest FTSE All Share Report puts the average price of shares on the rise from around £59.80 to around £64.20, but this could be a bit optimistic. It would seem that the actual value may be closer to the £63 mark.
Given that the value of the British Pound (GBP) against the USD is up, it seems that investors are taking a less optimistic view of the strength of the British economy. Although we do know that UK manufacturing firms do have lower profits than in previous years, this does not mean that inflation will be low.
To put it simply, the FTSE All Share Report suggests that this is just the beginning of a weak start to the UK’s economic recovery and the GBP/USD exchange rate may fall back in line with the exchange rate of the US Dollar. If this does happen, it is unlikely that the economy will recover soon.
The UK economy is at the mercy of its central bank, which can decide on whether or not the Bank of England will intervene in the currency markets. It has not yet done so, so the currency markets will be a bit in wait and see mode.
The outlook for the stock market is also uncertain. The stock market may hit a bottom that continues to deteriorate, or it may hit a new peak that is even lower than the recent lows.
If the stock market falls further, it is likely that the price of shares will be considerably lower. This means that some people will sell and avoid paying dividends or interest, so this could make for a difficult transition period for the financial sector.
The strength of the British Pound (GBP) has helped companies that have invested in other currencies stay afloat in difficult times. Companies such as Coca Cola and the BP oil company have received support from the British Pound in the face of the downward trend in the American Dollar.
It is very likely that more foreign currency businesses will choose to keep the UK Pound strong rather than risk the investment in the currency markets. This is a real pity, because the currency exchange rates are such an important part of the global economy. The latest FTSE All Share Report suggests that, over the next twelve months, companies will take the most advantage of the recovery of the UK economy and the strength of the Pound, but, hopefully, over the next twelve months we will see a return to growth. The danger, however, is that in the face of the recent recovery and more favourable exchange rates, the Bank of England’s intervention will push the economy into recession and more inflation.