Factors Influencing GBP & EURO Exchange Rate

FINANCIAL MARKET

GBP & EURO
The exchange rate can be defined as the value of one currency in differentiation to another.
However, the volatility present in the market makes it complex and confusing at times. The
economic factors that influence the exchange rate are as follows:
a. Interest and inflation rate
Inflation is a persistent increment in the price of goods and services over a period of time. It
indicates the amount that is charged by the banks when it comes to the borrowing of money.
The duo factors are linked together. People have a habit to borrow and spend when the rate of
interest is low that leads to increment in the cost. Such rates can be defined as direct
indicators of current, as well as the future economic performance of the country and
influences the decision taken by the forex investors and traders everywhere. An increment in
the rate of interest is witnessed by the increment in the currency (Skinner, 2018). It happens
to owe to the fact that the economy is progressing at a rapid scale and central banks are
looking forward to slowing inflation.
b. Deficits in the Current Account
The current account can be defined as the balance of trade that exists between a country, as
well as the trading partners. It enables to project the difference that exists between the value
of goods, as well as services trade with other countries. In this scenario, it is a common
parlance that if the country purchases more than the power it has to sell then a deficit can be
noted in the balance of trade. It impacts the rate of exchange directly because foreign is
demanded more by a country and this leads to the decline in the local currency (Nguyen,
2019). This leads to higher level of supply of the local currency in contrast to the foreign
currency.
c. Economic performance
Political stability is another important factor that influences economic performance. It needs
to be noted that a country that has a stable political environment enables the attraction of
higher level of foreign investments and vice versa. When increment in foreign capital
happens it leads to enhancement in the domestic currency value.
2