British Inflation on the Rise – What Are the Effects on the Forex Market?
Introduction
The British economy is currently troubled by a rising inflation rate. The British pounds attained its highest inflation rate since 1981 in October 2022 at 11.1%. Rising inflation rate devalues a currency and increases hardship within the country. To curb the rising inflation, the Bank of England (BoE) carried out a series of interest rate hikes for the pound bringing the interest rate to 3.0% in October. This had created large volatility for the pounds in the forex market. This is because forex investors registered with the forex brokers for beginners often looked up to the currencies with the highest interest rate as the best investment package for them.
This work will therefore help you understand the effects of the rising inflation rate of the British pounds on the forex market at large.
What is inflation?
The effects of inflation is one that everybody would be familiar with today. For instance, when you go to the market to buy something and discover that the prices of goods and services have continued rising over a while, then what comes to mind immediately is inflation. The term inflation is used to describe such situations when a currency loses its purchasing power resulting in prices of goods and services in the country rising rapidly.
Inflation arises when there is too much money chasing fewer goods and services in the market. Of course, the law of supply and demand suggests that prices will rise when the demand increases. People tend to spend more when they have more disposable cash with them and this is the major cause of inflation.
The British inflation rate and its effects on the Forex Market
The United Kingdom has experienced an increasing inflation rate since 2022. The inflation rate for the British pound had remained on a steady increase since the beginning of the year to attain four decades high in October 2022 with its inflation rate currently sitting at 11.1%. The last time the inflation rate got to this level was in October 1981.
The rising inflation rate for the pounds had caused so much volatility for all crossings with the pounds in the forex market, especially GBPUSD which fell to an all-time low at $1.03500 marking its lowest level since the decimalization of the pounds in 1971.
The rising inflation rate for the British pounds has caused the Bank of England (BoE) to take more aggressive steps towards controlling inflation, hence hiking its interest rate up to 3% in October. This attracted new investors into the British pounds and raised its exchange rate between the US dollar to the current level above $1.18820.
The British pound will be expected to remain volatile in all its crossed pairs in the forex market especially as the BoE will be expected to embark on a more aggressive interest rate hike to reduce the rising inflation during their next session.
What impact will the rising inflation have on the British pounds?
Generally, rising inflation reduces the value of a given currency. Hence, with the inflation rate for the pounds rising to four decades high in October, it is clear that the buying power of the pounds has been reduced.
However, the expectations of a more aggressive interest rate hike by the BoE will likely attract more investors to buy the pounds ahead of the interest rate hike. This will cause more volatility for the British pounds in the forex market.
On the contrary, failure to raise the interest rate more aggressively the BoE will disperse investors causing a massive decline in value for the British pounds at the forex market.
