March 17, 2023
In regards to the global economy, exchange rates pose a massive influence. Why? They affect investments, trade, and, in some cases, tourism. Whether an individual or a business owner, learning more about the factors impacting exchange rates is crucial.
In this handy guide, we’ll give insight into the importance of exchange rates, exploring both the Euro and the Great British Pound. Read on to discover more.
Exchange rate not only impacts export and import costs but also determines a currency's value relative to another, such as the Euro vs Great Britain Pound.
How? A weak domestic currency can heighten the competitiveness of exports, which in turn increases the economy of a country. And vice versa, a strong currency can lower the costs of imports, which proves advantageous to consumers but not local industries. These characteristics pinpoint the relationship between interaction trade and exchange rates.
If you are a jetsetter, you’re likely familiar with exchanging money, but have you considered the impact exchange rates can have on your spending total? To put this into perspective, if a British traveller plans a holiday to a European destination, and the exchange rate between the Great British Pound and the Euro is appreciative, you will be privy to more euros for each pound spent. The result? You get more bang for your buck.
The result? Your holiday becomes more affordable. If the exchange rate isn’t so favourable, your holiday will cost you more in the long run.
If you’re a business that regularly engages in international trade, learning more about exchange rates and how they affect your company is crucial. Why? They impact both your profit margins and proving strategies. An example of this? If you own a company based in Britain and export products to the EU, and the exchange rate between the British pound and the Euro is lower than usual, the price of your products will become more affordable to EU-based customers. This leads to a higher demand, thus affecting your business's sales and overall profits.
Whether an individual or a small business owner, learning the ins and outs of exchange rates and what factors affect them ensures you get more bang for your buck. When travelling, this may mean you get to embrace more experiences without having to spend more. You will sell or buy more in the business world, increasing your profit margins or sales.
In response to economic policies, governments monitor exchange rates closely. In some cases, to benefit the growth of an economy, they will intercede in currency markets. Why? This allows them to influence exchange rates. An example of this? To increase exports, a government may lessen the value of its currency. This attracts investments from overseas. In comparison? To improve stability and inflation rates, they will strengthen their currency.
Political stability is another factor to consider when considering exchange rates. Referendums or elections play a crucial role in setting exchange rates. An example of this? The 2016 Brexit referendum caused changes in the pound's value. This was in response to uncertainties surrounding the future relationship between the UK and EU.
The Euro’s introduction in 1999 highlights the above point in that political decisions can easily affect the British exchange rate landscape. Great Britain chose to opt out of the Euro. The result? The exchange rate between both the Euro and the Pound had an impact on both travellers and businesses. It influenced export, import, and travel costs. On the plus side, Britain’s decision to keep the pound has preserved its ability to manage its exchange rates and monetary policies independently.
Fluctuations in exchange rates are affected by several economic factors, some of which have a more profound effect than others. One of the factors is the difference in interest rates across the globe. When the Bank of England increases its interest rates, foreign investors embrace this. Why? They ensure a higher return on investments. The result? The value of the pound strengthens.
If the interest rates drop, so does the pound. This means investors will take their funds elsewhere.
Besides economic factors, interest rates, market sentiment, inflation rates, and political stability affect currency fluctuations. Furthermore, exchange rates are impacted by market participants, which comprise hedge funds, banks, individual investors, and central banks. This is one reason exchange rates vary, sometimes daily, and why they need to be tracked carefully, especially by businesses that trade internationally.
Following the above tips and trips when exchanging money or trading will ensure you’re privy to the best rates and the best deals. To embrace these often means paying close attention to them and only buying or selling when the exchange rates are favourable to you.
The bottom line? There is no "one-size-fits-all" approach to deliberating exchange rates. Exchange rates are affected by entity and country objectives and specific circumstances. While the strength of a currency may benefit one person, it could prove a disadvantage to another. To ensure you strike while the iron is hot, you must assess the potential impact exchange rates have on inflation, exports, employment, and economic stability as a whole.
Comprehending the importance and complexities of exchange rates will allow you to navigate the evolving global economic landscape and make informed decisions rather than rash ones.
