Forex Blog

British Pound (GBP) Plummets: Urgent Economic Fallout and Strategic

January 27, 2025 | 9:00 am | Forex Blog
January 27, 2025 | 9:00 am
Forex Blog

British Pound

This is a personal review of Will Tranter. He works hard at a big European bank to keep finances safe. He carefully watches market changes to reduce risks and protect people’s and businesses’ money. His expertise is a trusted guide in uncertain times. The British Pound (GBP) has reached its lowest level in over a year. This news comes amid reports that the UK has borrowed more than it has in the past 16 years. The two events are interconnected. Economists warn that the UK government will need to make changes to combat inflation levels.

However, government officials say there is still no need for emergency interventions. Despite these concerns, forex prop trading firms don’t seem to be influenced by them, and the market will continue to operate as usual. Meanwhile, reducing government spending or increasing taxes could be implemented gradually.

How’s the GBP Doing?

As of the time of this writing, the British Pound (GBP) is trading at approximately $1.21 against the US Dollar (USD). In the past six months, the British Pound (GBP) has depreciated by about 9 percent. In the last year, it lost value by about 4 percent.

Many analysts compare this data to the rise in the cost of borrowing. Generally, the British Pound (GBP) rises when borrowing costs increase. However, wider problems with the UK economy may challenge this rule.

Overall Growth of the British Pound (GBP)

Official figures from 2024 show a grim picture of overall growth. Simply put, there was no growth at all in the 3rd quarter of the year. In October 2024, the economy shrunk a bit, but the rest of the quarter balanced that out.

The Labour government blames these results on the past 15 years of conservative administration. Chancellor Rachel Reeves said the challenge to fix the economy “after 15 years of neglect is huge.” Shadow Chancellor Mel Stride said Monday’s figures showed “growth has tanked on Labour’s watch.” The new administration promised the fastest growth within the G7, but it seems it won’t be able to deliver.

Job Cuts

The Confederation of British Industry, representing hundreds of thousands of companies, expects “a steep decline in activity” starting in 2025. However, their research was done by a small sample of just 800 businesses.

At the same time, the British Retail Consortium, representing both large and small retail businesses, predicts a “spending freeze” starting in January, which is common.

Raising Prices

Inflation reached 2.6 percent in December, marking the second consecutive month at this level. The annual inflation rate is about 2.5 percent, mostly because restaurant and hospitality prices fell slightly. Many experts claim that delving deeper into these numbers presents an even worse picture.

Fuel and clothing prices rose the most, while airfare prices fell. This means that the prices of the items most needed and used regularly are still rising the fastest. This trend is likely to stagnate or even grow throughout 2025, and the Bank of England will almost certainly not cut interest rates soon.

The Interest Rates

The Bank of England has decided to keep borrowing costs unchanged at 4.75 percent. Over a longer timeframe, interest rates have actually dropped somewhat since they were at 5 percent in August 2025.

The UK interest rate averaged 7 percent from 1971 to 2024. During this period, there were changes, with the lowest rate being just 0.10 percent in 2010 and 17 percent in 1979. In general, the interest rate is rather high compared to recent memory.

Overall Growth of the British Pound (GBP)

A Global View

Inflation is a global problem, troubling most of the world. There are many complicated reasons behind the trend, some ongoing for years and some recent. Many claim that the effects of policy enacted during COVID-19 are still felt throughout the economy.

The incoming Trump administration is also imposing new policies or will soon start to do so. This includes tariffs on some goods, which always lead to inflation as the costs are transferred to consumers.

Comparison to Truss Budget

Many UK analysts compare the inflation issues to those in September 2022, when Prime Minister Truss created a new budget. This shows how much of an impact a higher gilt yield has on mortgages.

However, there’s a limit to how far this comparison can go. The yields are now higher than ever before, but that didn’t happen overnight—instead, it took months of slow increases. Truss’s policy produced the same effect within only a few days, and it was an obvious blunder.

Hedges against Inflation

With all the negative macroeconomic indicators mentioned, the general public is already making efforts to hedge against inflation. The first and most common measure is to limit expenses wherever possible and focus personal budgets on necessary goods. Many are already doing so.

Investors, on the other hand, are looking for investments that are most resistant to inflation. These include cryptocurrencies, gold, other precious metals, and real estate, as governmental actions can’t impact all of those as easily. Buying and holding these assets is often used to protect a portion of funds from rising prices.

To Sum Up

The GBP has experienced one of the biggest drops in the last decade. This drop is part of a larger, and some would argue, global trend, and it happens while the government keeps borrowing more money. Many feel that when combined, these indicators showcase a broader downward trend for the economy.

Many investors are preparing for a longer inflationary period and are looking for ways to invest in assets that won’t be affected by inflation, such as cryptos and gold. Given the change in the American administration and the prediction of low growth, the British pound (GBP) is likely to have a rough year.

Economic Factors to Consider When Forex Trading

Which Macro-Economic Factors to Consider When Forex Trading?

Creating the best Forex trading program, which will be the best option for Forex traders, whether it’s a single-step program or a combined program, depends on government actions and macroeconomic factors since they affect the value of foreign currencies. That’s why many investors are turning to trading cryptocurrencies using trading platforms with leverage, as those can’t be affected by central banks.

Investors should be aware of a few common macroeconomic factors. Some of them are interconnected, and changes in one will cause changes in others, compounding the effect on the currency. In this article, we’ll explore the complexity of forex trade with a focus on macroeconomics.

Interest Rates

Interest rates are an instrument used by central banks to control inflation. Higher interest rates attract foreign investors because they provide better returns on bonds. Lower rates mean that the currency is depreciating in value.

Foreign currency traders should follow the interest rates of the currencies they plan to invest in by comparing and contrasting pairs of currencies. For instance, if the Federal Reserve raises rates and the European Central Bank lowers them, the US dollar will gain in value compared to the Euro.

 Inflation Rate of The British Pound (GBP)

The inflation rate determines the cost of goods and services over time. Low inflation means that the price of goods and services is stable and doesn’t fluctuate. High inflation, on the other hand, indicates that prices are rising. From the perspective of a foreign currency trader, high inflation indicates that the value of a currency is lowering, as a consumer can buy less for the same amount of money.

Investors need to be aware that interest rates and inflation rates are interconnected. The market uses them, and government-owned central banks to affect the value of money approach it from two different perspectives.

Gross Domestic Product

Gross domestic product (GDP) refers to a country’s overall economic output. A strong GDP means that the country’s economy is growing, that it has many foreign investments, and that its currency is strong. On the other hand, a weak GDP indicates economic issues and possibly a weak currency.

It’s best to follow the country’s GDP over a longer time period and, therefore, spot a trend if there is one. For instance, if the US GDP grows for a while, chances are that so will the value of the US currency compared to the Euro or GBP.

Employment Data

Employment data showcase the number of people employed in an economy and the number looking for a job. They can also show the number working part-time or overtime. Employment data is also an indicator of the strength of the national currency. Economies with high employment are usually robust, and their currencies perform well.

Most countries have separate statistics for non-farming jobs, as those employed on their own farm are treated as small business owners. It also helps to be aware of how many employees work in the public sector and how many retirees there are.

Trade Balance

trade balance is the difference between a country’s imports and exports. If a country has a trade surplus (more exports than imports), it boosts the need for local currency. Foreign buyers need more of the currency to pay for the goods the country is exporting.

For instance, countries such as Germany always have surpluses, which increases the value of the Euro compared to other currencies. Turkey, on the other hand, always has a deficit, and the value of the Lira is always somewhat weaker compared to currencies in countries of comparable size.

Debt

High levels of debt discourage foreign investors from operating within a country. Debt sometimes indicates that the country’s economy is in trouble and that it depends on borrowing money to operate.

Extensive borrowing can also lead to inflation, as the amount of money in the system isn’t suited to its actual needs or abilities. This is what happened to the UK, and it’s one of the reasons the British Pound (GBP) has been in such poor condition for so long. However, it’s important to note that some debt can be a good thing if it’s used to fund infrastructure and support entrepreneurship.

Geopolitical Stability

This is the most difficult economic factor to pinpoint, but it can really affect the value of a currency and the trader’s plans. National security, a stable political system, and free and fair elections are all parts of geopolitical stability that contribute to a steady currency.

Predictable governmental and tax policy is also essential for businesses to thrive. In most cases, businesses prefer a policy that they don’t agree with but one that they can predict and prepare for.

Market Sentiment

Market sentiment refers to the general public’s attitude toward the state of the economy. Risk-on sentiment, often seen as optimism about the market, leads to a stronger currency and better overall performance. During this period, forex investors prefer high-yield currencies like the Australian dollar (AUD).

In the risk-off period (or pessimism), traders may turn to stable, safe-haven currencies such as the US dollar. These currencies have a reputation for bouncing back even after a major crisis, which is what happened to the US dollar during the last major crisis, the COVID-19 pandemic.

Concluding Insights

GBP has dropped in value recently as part of an ongoing global inflation trend. The government hasn’t yet taken any measures to address this, and the matter is being carefully studied as it is not new and very complex. Fiat currencies, unlike cryptos, depend on governmental actions and wide market trends. That’s why traders should follow macroeconomic factors that affect the value of national currencies.

This includes geopolitical stability, the level of national debt, employment levels, GDP levels, inflation levels, and many others. At the same time, traders should be aware of the overall public sentiment towards the economy and, therefore, the national currency.

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