The exchange rate between UK Pound and US Dollar changes in the Foreign Exchange Market every day and even every minute due to the buying and selling activities around the world. The buying and selling performed by individuals, banks as well as governments are affected by different factors, such as demand for consumption, confidence and expectation of the currency future value. This report is mainly divided into two parts, which are the explanations of the historical exchange rate changes from January 1st to November 20th and the future spot exchange rate prediction until year 2013.
Explanations of the historical exchange rate changes
The exchange rate of Pound is USD1.6167/ £ in the first of January, and it has slightly decreased to USD1.5985/ £ in the twentieth of November (Figure 1). The eleven months of 2010 is divided into four major periods according to the exchange rate's moving trend and the influential factors in our explanations.
1. The first half year of 2010 (January to May)
There are two significant factors to the depreciation trend in the first half of the year. Firstly, the Greek debt crisis has affected the investors’ level of confidence in UK. After the downgrading of Greek long-term debt from A to BBB+ in December, Moody’s, a credit rating agency, warned the UK government due to her heavy debt ratio at the beginning of 2010. The agency claimed that it was hazardous to hold the structural public deficit over 10% of GDP, which is approximately the same level as Greece. The announcement has seriously affected the confidence level of UK investors, and the exchange rate of Pound against USD dropped through the first half year until the rescue plan to Greece published in May. Secondly, the expansionary monetary policies of the UK government in 2009 had pushed up the price of domestic commodities dramatically in the first half of the year due to excess money supply in the market. The inflation rates were comparatively higher than... [continues]
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