It’s commonly referred to as the pound, but some people still refer to it as sterling. But regardless of what it may be called, the British pound sterling remains to be one of the strongest currencies throughout the world. It comes as a surprise to some—especially those outside of Britain and those who don’t travel quite often—but it actually makes a lot of sense for the pound to be so expensive. It’s great for those coming from the UK to travel to other countries; but for some of us trying to spend our hard earned money in the UK, we’re short out of luck. These are just a few reasons that explain why the pound is so expensive, and there are certainly other factors that affect exchange rates. The factors listed here can definitely affect change, but at the same time, the decisions of financial institutions such as the Bank of England, the European Central Bank, and the US Federal Reserve all have major effects on currency exchange as well. For now, suffice it to say that influence is distributed evenly among these factors. Here are a few reasons why the British pound sterling is so expensive these days.
Plenty of folks throw the word “inflation” around without really understanding what it means. But inflation is one of the best explanations why the pound is just about 1.2 the amount of the US dollar. According to this article, inflation can be defined as the rate of increase in the price of goods and the “decrease in purchasing power of funds.” To understand this fully, we’d have to look at Britain’s exportable goods. Some of the UK’s top exports include various machinery, cars, precious metals and minerals, pharmaceuticals, and more. The demands for these products are constantly high, and so the pound is always on an incline. With Britain’s inflation rate lower than many countries, its purchasing power is therefore higher. This is one reason why the pound exchange rate is strong and why it almost always is.
Investors have a lot of control over what goes on with the global currency exchange. When we begin to talk about speculation and how much it affects the rate of the British pound, it’s sometimes hard to believe. Speculation merely refers to the conclusions made by experts in the finance industry regarding the value of a specific currency. For example, if economists speculate that the value of the pound is going to increase (or is already in an increasing track), investors are more likely to demand and invest in that particular currency. When investors put in large sums of money to invest in currency in order to make a larger profit margin, the exchange rate volatility is heavily affected in return. The British pound has been a strong currency for a while now, and investors still believe this currency is worth investing in. Until this cycle is broken, investors will continue to affect the strength of the pound in an increasing way.
Balance of Payment
This is probably one of the more important factors in the characteristic of the current pound sterling currency. Simply put, the Balance of Payment (or BoP) is a country’s record of the transaction with the rest of the world. The BoP shows the flow of money in and out of a country with regards to its export and import behavior. Most countries have a deficit on their account, but this simply means that the value of imported goods is higher than the value of the export goods. Currently, Britain has had its narrowest deficit since 2012 at about £ -30.1 million. As a comparison, America’s current BoP deficit is roughly at USD$ -130.4 billion. Deficits and Surpluses can’t define the value of a currency, but they sure do count as huge factors.
The amount of a government’s debt can have a tremendous impact on the value of a currency. For instance, if foreign investors believe that a country will not be able to pay its debt, the only logical move to do is get rid of holdings in that country. The UK’s government debt actually just surpassed the £1 Trillion mark, and this is certainly not good news for anyone. To put it into perspective, America’s government debt is recently calculated to be roughly $22.78 Trillion. While the UK is light years behind America in debt, it’s important to know that the debt is really not the key to currency value. It’s the belief of whether the country in question is capable of paying that debt down. Britain has always had solid government debt ideas, but Britain’s system does need an overhaul. Whether that will happen soon enough doesn’t really matter. What matters is that foreign investors trust in the value of the pound, and so its value actually increases.
Here’s another reason why the British pound sterling is such an expensive currency: sentiment. Sentiment ties in with speculation, but this time it’s just on the average citizen or collective. We’re no longer talking about what the economists are saying or what the experts are thinking. When you’re talking about sentiment, you’re simply going by the opinion of the individual or the group. You could say that one reason why the British pound is valued so high is that people believe that it has a high value. It just happens to be the majority opinion. If that opinion begins to decline, there’s a possibility that the value of the pound could go down as well. Observing the sentiment of the nation towards its currency will show how much value that currency has. There’s a tiny correlation between the positive opinion of a nation regarding its currency and the actual value of the currency locally and internationally.