The escalation of inflation in the United States has prompted the country’s Federal Reserve to increase the interest rate rapidly. In most instances, these changes have mostly favoured the dollar against other global currencies. The effects of these rate changes on global currencies are a strong reminder that the financial system is global.
For anyone wondering about the forex market and its relationship with interest rate changes, it is worth noting that there is a strong interlink. It is not by accident that the Pound is rebounding after recent losses. As forex pairs show, the Sterling continues to strengthen amid a reducing Fed rate. Investors may want to take note of the possible effects both in the short term and longer term.
Interest Rate and the Trader
All this concern about what is happening in the Fed and the ripple effect on the dollar and other currencies is because of one thing – the forex market and interest rate are closely related. The latter makes the former go around.
The steady increase in the price of services and goods is referred to as inflation. It is the reason why a product costs 30 times more than it did in the 1930s. Inflation and economic growth are inseparable. However, inflation can be unhealthy, as has been the case in the UK. It must be checked. Central banks globally are there to take care of economic elements, inflation being one of them.
Interest rates are always changing to go in tandem with the monetary cycles. And speculators will predictably be there to estimate when rates will change and by how much. The rates can change drastically, so a forex trader had better watch out.
Latest on the Strengthening Pound
Similar to all other major currencies, the pound has had a rather slow 12 months. From a high of 1.40 at the end of the second quarter of 2021, the currency went to as low as 1.15. This is a historical low that desperately needed a reprieve.
November has largely seen the Pound rise as domestic worries about the fiscal situation ease and investors gain more confidence. The pound hugely benefited from indications that the Federal Reserve is in a phase of reducing interest rates. Signs of rate reduction came from the recent Fed meeting for November. It is a shift that most never expected; instead, they saw a situation whereby the Fed would tighten the policy even more.
In recent hours, the pound has risen sharply against the US Dollar and the Euro, not to mention other leading currencies. At a point on Thursday, the currency’s exchange rate to the Dollar hit the 1.2113 mark. An average bank would therefore transact at a rate of about 1.1850. To the Euro, the Pound was exchanged at 1.1644 and an average bank could do it at 1.1354.
Strong Pound, Good News
Experts believe that the bank of England will raise interest rates to at least 3.5%. Dave Ramsden, the Deputy Governor of the BoE has already indicated this is a probable move. He however insists that the economic performance will determine whether this rise is implemented.
Believe it or not, a strong pound is attractive because it boosts UK market confidence. The market sentiment is better regarding investors’ view of the market – it is much better currently than previously. Foreign investors find the UK market proposition irresistible when the GBP is strong.
While overseas earnings may be limited by a lower-value dollar, UK stocks gain because people from all over the world would want to have a piece of the cake.
Conclusion
Drawing from this news, it is evident that the market is still volatile. However, it is highly unlikely that the pound can have a more pronounced downside. Still, proper forex management demands that one needs to plan. That’s the only way to secure an investment.
One may also want to remember that there is no one-size-fit-all approach to investment. Everyone has a plan that fits them. Contacting a specialist is one of the best ways to be sure of a profit amid the prevailing volatility that could see the Dollar and Sterling regaining parity.
