Ella 
The pound and the dollar are two of the most widely traded currencies in the world. Both the US dollar (USD) and the British pound sterling (GBP) play crucial roles in international trade and finance. However, the relative strength of these two currencies can significantly affect global economic dynamics. In recent years, the GBP has been consistently stronger than the USD. This article will explore some of the reasons why this phenomenon has occurred.
Relative Economic Performance
One of the primary factors behind the strength of the GBP is the relative economic performance of the UK and the United States. While both countries have experienced economic growth in recent years, the pace of growth in the UK has outstripped that of the US. According to data from the International Monetary Fund (IMF), the UK’s GDP growth rate was 1.8% in 2019, while the US’s was 2.2%. While this may not seem like a significant difference, over time, it can accumulate and lead to a stronger currency.
Additionally, the UK has historically had a current account deficit, meaning that it imports more goods and services than it exports. Despite this, in recent years, the UK has managed to reduce its current account deficit, which has helped to boost the value of the GBP. In contrast, the US has consistently run a current account deficit, which can put downward pressure on the value of the USD.
Interest Rates
Another critical factor affecting the relative strength of the GBP and the USD is interest rates. Interest rates impact the value of currencies because higher interest rates tend to attract foreign investment, thereby increasing demand for the currency. In the UK, the Bank of England (BoE) has gradually increased interest rates over the past few years, while the US Federal Reserve has only made slight adjustments to its interest rate policy.
As of June 2023, the BoE’s base interest rate stands at 1.25%, while the Federal Reserve’s target interest rate is 0.75%. The relatively higher interest rates in the UK have made the GBP more attractive to investors, which has helped to increase demand for the currency and drive its value higher.
Brexit
The decision of the UK to leave the European Union (EU), commonly known as Brexit, has also had a significant impact on the relative strength of the GBP and the USD. Since the referendum result in 2016, the value of the GBP has been subject to significant volatility. Immediately following the referendum, the GBP fell sharply against the USD.
However, since then, the GBP has steadily recovered, and in recent years, it has been consistently stronger than the USD. One reason why Brexit may have contributed to the strength of the GBP is that it has reduced uncertainty around the future of the UK economy. While there are still many unknowns regarding the long-term impact of Brexit, the fact that a path forward has been established has helped to stabilize the GBP.
Political Stability
Another factor that can affect the relative strength of currencies is political stability. Political instability can create uncertainty and risk, which can reduce demand for a currency. In recent years, the US has experienced significant political turmoil under the Trump administration, including impeachment proceedings, trade disputes, and the handling of the Covid-19 pandemic.
In contrast, the UK has experienced relatively more political stability, with a Conservative majority government elected in late 2019. This stability may have contributed to increased confidence in the UK economy and the GBP, leading to its relative strength compared to the USD.
Conclusion
A variety of factors contribute to the strength of the GBP relative to the USD. These include relative economic performance, interest rates, Brexit, and political stability. While the current strength of the GBP is not likely to be permanent, understanding the factors driving it can provide valuable insights into global economic dynamics and potential future trends.
As with any currency, predicting the future value of the GBP relative to the USD is challenging. However, by paying attention to economic data and geopolitical events, it is possible to gain a better understanding of the factors that are likely to impact the relative strength of these two currencies in the years to come.
