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Exchange rate Term Paper

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Exchange rate Term Paper

Introduction

For this discussion, the chosen country is the United Kingdom (UK), and its currency is

the Pound Sterling (£). The currency and country of interest have gained significance in the UK

and EU since the withdrawal of the United Kingdom from the European Union. Free-floating is

how the International Monetary Fund refers to the UK's currency exchange. The value of a

currency in such a system is determined by a number of interrelated factors, such as the state of

the economy and the actions of the market (Nyasha & Odhiambo, 2013). As a result, the pound's

value has constantly varied in relation to other currencies. The Sterling Pound's value versus the

dollar and euro dropped significantly after Britain's referendum on EU membership. The pound's

exchange rate versus the US dollar and the euro has fluctuated ever since the Brexit referendum.

Imports and exports and the cost of products and services can be affected by the weakening of

the pound.

Efficacy of the pound's exchange rate versus other currencies may be measured using the

effective exchange rate index (ERI). The limited version of the index includes countries whose

percentage of UK imports or exports on aggregate over the last three years exceeds 1%. Bilateral

exchange rates are considered in the ERI calculation (Nyasha & Odhiambo, 2013). As a result,

the weights used in the ERI represent the volume of trade in manufactured products and services,

according to the Bank of England's explanation. An example based on US imports, competition

between UK exports and US commodities in the US, and competition between UK and US
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exports to third-country markets is provided by the bank to illustrate the weights of the dollar in

the sterling ERI (Nyasha & Odhiambo, 2013).

Many private UK banks, international banks, and building societies may be found in the

United Kingdom. With its head office in London, the Bank of England serves as the country's

central bank. Several large banks compete for supremacy in the industry, which is controlled by

them. UK banking has grown significantly, with over 344 banks and 52 building societies

presently in operation. Internet banking is used by two-thirds of British people, while mobile

banking is used by four out of ten, both of which have witnessed steady growth in recent years

(Nyasha & Odhiambo, 2013). Physical banking, on the other hand, is still quite popular in the

United Kingdom, where there are about 20,000 locations. The Bank of England has served as the

country's central bank since 1946, when the government acquired ownership of the institution.

UK banking is regulated by the Financial Conduct Authority.

Even though the United Kingdom has been a member of the European Union since the

early 1970s, the country chose not to adopt the Euro single-market currency. Instead, the British

Pound Sterling remained the country's official currency (GBP). As of June 2019, the GBP is

trading at 0.89 to the Euro (EUR) and 0.79 to the US dollar (USD). Currency in the United

Kingdom consists of the pound (£) and the pence. Only one pound and two-pound coins are in

use at any given time (Nyasha & Odhiambo, 2013). The most often used bills are the five-pound,

ten-pound, twenty-pound, and fifty-pound bills. The £5 and £10 notes are now composed of

polymer, which is more durable and difficult to forge due to recent modifications in the currency.

In 2020, a new £20 banknote will also be introduced (Nyasha & Odhiambo, 2013).
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Daily Exchange Rates (1st Jan 22 to 1st Apr 22)

This section analyzes the variations in the exchange rates of the Kenya Shillings vs the

Pound Sterling compared to the US Dollar and the South African rand (CBK, 2022). The

exchange bases are measured against the Kenyan Shillings. The UK Pound has a higher value

compared to the US Dollar, and the South African Rand and the percentage change is as

illustrated below;

Mean (Exchange rate compared with

Date Kshs) %Change
STG US SA Pound to
  POUND DOLLAR RAND USD Pound to Rand
1/3/2022 152.3362 113.1382 7.0802 25.73% 95.35%
1/4/2022 152.4871 113.1559 7.1484 25.79% 95.31%
1/5/2022 152.5168 113.1735 7.05 25.80% 95.38%
1/6/2022 152.9909 113.1853 7.0934 26.02% 95.36%
1/7/2022 153.1135 113.2206 7.1965 26.05% 95.30%
1/10/2022 153.2485 113.2382 7.2415 26.11% 95.27%
1/11/2022 153.6771 113.2765 7.2559 26.29% 95.28%
1/12/2022 153.8135 113.3118 7.3085 26.33% 95.25%
1/13/2022 154.2744 113.3329 7.3621 26.54% 95.23%
1/14/2022 155.1326 113.3676 7.3866 26.92% 95.24%
1/17/2022 155.0606 113.3941 7.3864 26.87% 95.24%
1/18/2022 154.6474 113.4147 7.346 26.66% 95.25%
1/19/2022 154.3244 113.4676 7.3611 26.47% 95.23%
1/20/2022 154.5668 113.5 7.3923 26.57% 95.22%
1/21/2022 154.2982 113.5176 7.4646 26.43% 95.16%
1/24/2022 153.9971 113.5294 7.5182 26.28% 95.12%
1/25/2022 153.535 113.5382 7.4422 26.05% 95.15%
1/26/2022 153.0818 113.5471 7.4552 25.83% 95.13%
1/27/2022 153.16 113.5471 7.3656 25.86% 95.19%
1/28/2022 152.6029 113.5706 7.3573 25.58% 95.18%
1/31/2022 152.5526 113.5735 7.2914 25.55% 95.22%
2/1/2022 152.5824 113.5765 7.3577 25.56% 95.18%
2/2/2022 152.8794 113.5765 7.4374 25.71% 95.14%
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2/3/2022 153.3412 113.5865 7.3816 25.93% 95.19%

2/4/2022 153.6479 113.6029 7.3992 26.06% 95.18%
2/7/2022 153.7853 113.6088 7.3493 26.13% 95.22%
2/8/2022 153.5612 113.6206 7.3377 26.01% 95.22%
2/9/2022 153.7871 113.6265 7.355 26.11% 95.22%
2/10/2022 153.8906 113.6265 7.4361 26.16% 95.17%
2/11/2022 153.8541 113.6265 7.51 26.15% 95.12%
2/14/2022 153.8953 113.6265 7.4581 26.17% 95.15%
2/15/2022 153.6891 113.6294 7.4725 26.07% 95.14%
2/16/2022 153.8129 113.6353 7.5087 26.12% 95.12%
2/17/2022 153.8718 113.6382 7.5222 26.15% 95.11%
2/18/2022 154.3015 113.6735 7.5844 26.33% 95.08%
2/21/2022 154.3968 113.6882 7.556 26.37% 95.11%
2/22/2022 154.4291 113.6941 7.5122 26.38% 95.14%
2/23/2022 154.225 113.7424 7.5226 26.25% 95.12%
2/24/2022 154.7103 113.8 7.4355 26.44% 95.19%
2/25/2022 152.8926 113.8206 7.4159 25.56% 95.15%
2/28/2022 152.6794 113.8353 7.5042 25.44% 95.08%
3/1/2022 152.7197 113.8412 7.3996 25.46% 95.15%
3/2/2022 152.8182 113.8529 7.3921 25.50% 95.16%
3/3/2022 152.2453 113.8894 7.3769 25.19% 95.15%
3/4/2022 152.4115 113.9147 7.3785 25.26% 95.16%
3/7/2022 151.8965 113.9471 7.4154 24.98% 95.12%
3/8/2022 150.75 114.0129 7.4676 24.37% 95.05%
3/9/2022 150.1944 114.0753 7.4406 24.05% 95.05%
3/10/2022 150.0571 114.1353 7.5177 23.94% 94.99%
3/11/2022 150.4062 114.1794 7.5467 24.09% 94.98%
3/14/2022 150.5582 114.1853 7.604 24.16% 94.95%
3/15/2022 150.0415 114.2324 7.5881 23.87% 94.94%
3/16/2022 149.7074 114.2865 7.5654 23.66% 94.95%
3/17/2022 149.8271 114.3144 7.6185 23.70% 94.92%
3/18/2022 150.4456 114.3806 7.6504 23.97% 94.91%
3/21/2022 150.3156 114.3953 7.6151 23.90% 94.93%
3/22/2022 150.6421 114.4353 7.6825 24.03% 94.90%
3/23/2022 151.3297 114.4971 7.7337 24.34% 94.89%
3/24/2022 151.4982 114.6 7.7385 24.36% 94.89%
3/25/2022 151.3032 114.6853 7.7985 24.20% 94.85%
3/28/2022 151.4079 114.7529 7.8552 24.21% 94.81%
3/29/2022 151.0572 114.825 7.8775 23.99% 94.79%
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3/30/2022 150.3429 114.8731 7.8426 23.59% 94.78%

3/31/2022 151.1268 114.9513 7.9399 23.94% 94.75%
4/1/2022 151.1268 114.9513 7.9399 23.94% 94.75%

From the analysis, the UK currency is stronger than the US Dollar by an average of 20%

while higher than the South African rand by 90% (CBK, 2022). Between 1st Jan 2022 and 1st Apr

2022, the UK currency has gained much value over the other currencies presented in the

comparison table above.

Factors that Affect the Changes in Foreign Exchange Rates

Currency exchange rates fluctuate in response to changes in market inflation. The

currency of a country having a lower inflation rate than its neighbor will appreciate. Inflation is

lower when the cost of goods and services rises at a lesser rate. When inflation is low, the value

of a country's currency rises, but when inflation is high, the value of a country's currency falls,

and interest rates rise (CompareRemit, 2014). Changes in the interest rate affect the value of a

currency and the rate at which it is exchanged for a dollar. Inflation, interest rates, and the

dollar's value are all tied together. The value of a country's currency rises as interest rates rise

because lenders benefit from the higher returns provided by higher interest rates, resulting in

higher exchange rates (CompareRemit, 2014).

Exchange rates may also fluctuate as a result of a trade deficit. The terms of commerce

are the ratio of export prices to import prices, which are related to current accounts and the

balance of payments (CompareRemit, 2014). To increase a country's terms of trade, its export

prices must grow at a faster rate than its imports prices. As a result, the demand for the country's
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currency rises, increasing the currency's value. This leads to an increase in the value of the

currency.

The strength of a country's currency can be affected by its political and economic

situation. Foreign investors prefer to place their money in a country with a lower danger of

political upheaval; thus, their investments are diverted from those in more stable nations

(CompareRemit, 2014). The value of the country's currency rises due to an increase in foreign

investment. A country with solid financial and trade policies can't tolerate currency value

instability. However, currency values may fall in a nation with a history of political unrest

(CompareRemit, 2014). For example, the US and UK have faced economic and political

challenges since the commencement of the Russian-Ukraine war. This has affected most

economic activities and caused political tensions. Nevertheless, the two countries have been able

to manage effectively.

Inflation rates in the UK

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During the period ending in January 2022, the Consumer Prices Index (CPIH) grew by

4.9 percent, up from 4.8 percent in the year ending in December 2021 (Payne, 2022). It's the

greatest 12-month inflation rate in the National Statistic series, which began in January 2006, and

the highest rate since May 1992, when CPIH peaked at 5.1 percent. The prior year's coronavirus

(COVID-19) lockdowns are still having an impact on inflation rates today. Office for National

Statistics (ONS) Beware Base Effects blog illustrates how low prices for specific products during

past times affect present inflation rates (Payne, 2022). During the 12 months ending in January

2022, the Consumer Prices Index (CPI) climbed by 5.5 percent, up from 5.4 percent in December

2021. This is the highest 12-month CPI inflation rate since the National Statistics series began in

January 1997, and it was last worse in the historically modelled series in March 1992, when it

stood at 7.1% (Payne, 2022).

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Purchasing Power Parity and Forecast

The PPP holds between the UK and the US, bearing the close correlation between the

Pound Sterling and the US Dollar compared to the cost of products (prices of specific

commodities that consumers purchase in the same countries with different currencies). The UK's

currency exchange is expected to stabilize at 150 against the Kenyan Shilling bearing the high

financial uprising in the UK and the US. Besides, the potential benefit for the currency in the

future is its stability against the market forces from competing countries such as the US and other

countries. However, the potential risk is poor political, social and economic stability in the UK

for the foreseeable future.

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References

CBK (2022). Foreign Exchange Rates | CBK. [online] Centralbank.go.ke. Available at:

https://www.centralbank.go.ke/rates/forex-exchange-rates/.

CompareRemit (2014). 8 Key Factors that Affect Foreign Exchange Rates. [online]

Compareremit.com. Available at: https://www.compareremit.com/money-transfer-

guide/key-factors-affecting-currency-exchange-rates

Nyasha, S., & Odhiambo, N. M. (2013). The evolution of bank-based financial system in the

United Kingdom. CORPORATE OWNERSHIP & CONTROL, 483.

Payne, C. (2022). Consumer Price inflation, UK - Office for National Statistics. [online]

www.ons.gov.uk. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/

consumerpriceinflation/january2022.