British Pound Hits Record Low Against US Dollar | CompareRemit
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Why Is GBP at a Record Low Against USD?

Updated on October 10, 2022 02:24 pm
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The value of most of the major currencies in the world is determined by supply and demand in the foreign exchange market—a currency's value increases when there is a great demand for it, and vice versa.

A country's foreign exchange rate provides a window into its economic stability, and it is closely watched and analyzed.

What Is GBP?

GBP, or British Pound Sterling, is the official currency of the United Kingdom and its territories. It is denoted by £.

The most popular currency pairing involving the British pound is the GBP/USD and EUR/GBP.

Why is GBP Falling?

The pound hit a record low versus the US dollar on September 26, 2022.

Investors rushed to dump government assets and currencies as the British pound fell to its lowest value ever versus the US dollar.  Let’s look at why GBP is falling. 

Source: XE

UK's Tax Plans

Typically, the UK Chancellor outlines the budget for the 12 months once a year.  The announcement typically includes new government programs, projected tax system reforms, and adjustments to the welfare and social care systems.

Liz Truss became prime minister midway through the fiscal year, and her chancellor Kwasi Kwarteng announced what had been dubbed a "mini budget" in the run-up to the announcement.

The tax system underwent some of the most significant changes in recent history:

  • Elimination of the highest marginal rate of tax.
  • Recalled the recent increases in levies for health and social care.
  • Removed the reductions in the tax on property sales.
  • The reversal of proposed increases to the corporation tax.
  • Scrapped the proposed hike in alcohol taxes. 

The value of the pound plummeted following British Chancellor of the Exchequer Kwasi Kwarteng's announcement that the country would impose the largest tax cuts in 50 years, including removing the 45% tax rate on incomes over 150,000 pounds ($162,000).

The drop of almost 5% to slightly over $1.03 occurred during trading in Asia and Australia. It extended a 3.6% drop from 23 September, leading to predictions the pound might fall to parity with the US currency. It managed to rebound marginally and returned to $1.07 after European traders started trading online.

The proposed tax cuts aim to strengthen the struggling UK economy and lessen the likelihood of a severe recession. However, it has led to worries about higher price increases, unmanageable government debt, and a worsening recession.

Waning Investors' Confidence In The British Economy

Investors are worried about the UK's capacity to manage such a large increase in debt, as evidenced by the dropping value of the pound, particularly because rising interest rates have made borrowing far more expensive.

The UK's economy, which has the highest inflation rate among the G7 countries, and the government's huge fiscal bet on growth are hurting the pound more than most currencies. Compared with a decline of 15% in the euro, the British pound has lost close to 21% of its value so far this year.

The previous record low for the British pound against the US dollar was on February 25, 1985, when it hit an all-time, falling to a value of little over $1.05.

Political Instability 

Political decisions made in the UK have long hurt the British pound. Recent instability includes political infighting, forming a new government, a second Scottish independence vote, a potential trade war with the EU over the Northern Ireland protocol, and Brexit. Political instability negatively impacts the GBP. 

In addition, if the conflict in Ukraine escalates, both the Pound and Euro will experience a significant fall.

The government will need to borrow an additional 72 billion pounds ($77.7 billion) over the upcoming six months to finance the tax cuts and a scheme to help consumers deal with their growing energy bills.

What Makes The US Dollar So Powerful?

The US dollar has been on an upward track since mid-2021 and achieved a 20-year high in August versus six major currencies. The value of the pound fell to an all-time low against the US dollar. Two key factors contribute to the strength of the USD:

Confidence in the US Economy Relative to its Counterparts

Similar to how falling investor confidence in a country's economy is reflected in a currency's depreciation, rising investor confidence in a currency indicates that the prospects of an economy are strong.

Because the US has such a strong and massive economy, the US dollar has always been regarded as a safe haven for investors. So if there is global uncertainty, holding US dollars is considered a safe bet because they maintain their value well.

Even while the US economy is struggling with high inflation and slowing growth, it is still seen as being in a better position than other economies like the UK and the Eurozone, which are both widely considered to be in a recession.

Understandably, investors are turning to the US dollar in light of the conflict in Ukraine, the political and economic issues in Europe, the high rate of inflation, etc.

Rise in the Dollar’s Interest Rate by the US Federal Reserve

The dollar price has increased due to investors being tempted to exchange other currencies for dollars since depositors at US banks now receive higher interest rates.

Interest rates have been rising at the same time in other countries' central banks, notably the UK, and the eurozone plans to follow suit, but not as aggressively as the US. And with Japan not tightening its monetary policy, the net result is greater demand for greenbacks overseas.

The dollar's strength also makes it more challenging for many developing countries to pay back their debts, which are frequently held in US dollars.

These countries will either need to increase taxes on their people, print local currency that will inflate, or just increase borrowing. Depending on the course taken, there may be a severe recession, hyperinflation, a sovereign debt crisis, or all three at once.

What Can the UK do to Stop the Fall of the Pound?

To attract foreign investors with higher yields, raising interest rates is the primary tool available to support the pound or any other declining currency.

The UK's central bank decided against an unforeseen rate hike, despite calls for quick action from experts. Bank of England and Bank of Japan both have the option of raising rates to keep pace with the rising US interest rates.

This may help, but it won't have much of an impact on currency prices if investors don't witness bold enough steps from the BoE or BoJ. For example, a higher increase in the rates than what is expected.

However, the problem with an extremely large increase in interest rates is that they are probably going to cause the economy to enter a recession, which nobody wants to happen.

Governments can also take direct action by buying up their currency to support its value, but many countries frown upon this, and it runs the danger of resulting in trade penalties. 

Furthermore, the pound and yen are officially floating exchange rates; governments do not frequently meddle in the foreign exchange market.

In an aggressive bid to combat the US economy's ongoing problems with high inflation, the Federal Reserve recently approved a third consecutive 75-basis-point increase.

The future for the global economy appears particularly bleak when these factors are combined with a severe fall in US dollar liquidity and a sharp increase in US interest rates.

What to Expect in the UK as an Indian Tourist

Tourists who are already in the UK and want to use their native currency for transportation, shopping, and dining will benefit from the pound's decline.

The cost of hotel and travel packages will decrease in GBP, but not for packages priced in rupees. According to the most current exchange rate between the rupee and the pound, hotel rates will reduce by 5-8%.

The pressure on GBP will increase due to the problems mentioned above and various other factors, and it will continue to decline against the USD and consequently against the INR. As of October 4, 2022, the GBP to INR exchange rate has been fluctuating around 1GBP/92INR.

Additionally, keep in mind that you will pay a forex markup of 2–3% for payments made in GBP.

However, given the value of the pound has been continuously falling since the start of the year, the savings will be insignificant.

For anyone booking flight tickets to the UK, note that for airline tickets priced in Indian rupees, currency fluctuations do not affect their prices as airlines generally sell tickets in the currency of the country of origin.

If you are looking to transfer money online from GBP to INR, you can use CompareRemit’s online comparison tool to check today’s best exchange rates.

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