Factors Affecting Exchange Rates

• Relative interest rates- If interest rates are high, there is better return for savings in the UK, meaning greater hot money flows into the UK. This means there is increased demand for Sterling, so the value of the pound increases

• Relative inflation rates- A country with lower inflation rates means the price of exports will be lower (and more competitive) compared to other countries, resulting in an increase in volume of exports (increased demand), thus increasing the value of exports. This increases the demand for Sterling, which increases the value of pound

• Speculation of future value of currency- If currency is looking stable, there is greater confidence in the currency. This means demand for Sterling increases, so the value of the pound increases

• Net trade position (exports vs imports)- Greater value of exports compared to imports means greater demand for Sterling, which means value of the pound increases

• Foreign investment into country- Greater investment into country means greater injections into economy. This means there is greater demand for Sterling, so value of the pound increases