Week 21, 2013: Sterling Exchange Rate

Summary: The pound fell against the dollar this week, as low inflation numbers suggested that the Bank of England could keep interest rates low for longer than previously expected. We take a look at the longer-term trend.

What does the chart show? The chart shows the average weekly midpoint price (the price halfway between the "buy" and "sell" prices) of the British Pound (GBP) against the U.S. Dollar in blue (measured against the left hand axis) and the Euro in red (measured against the right hand axis). This is the amount of dollars or euros that can be bought for £1.

Why is the chart interesting? A certain amount of volatility is to be expected in currency markets, but at the beginning of 2013 the pound plummeted against both the dollar and the euro, reaching its lowest point against the dollar in over two years.  Since March, there has been a slow recovery, but that looks to have stalled over the past week as markets reacted to news that the CPI rate for April fell to 2.4%.  On the surface, the lower inflation number looks to be good news, but one explanation of the reaction was that lower inflation would enable the Bank of England to keep interest rates at a record low level, which is not particularly attractive for investors.