Against the backdrop of stock market volatility across the globe and a hawkish turn on the part of the Federal Reserve, the Dollar neared 18-month highs against other major currencies last week. Several diverse factors could determine whether this trend will hold over the near term.
The Bank of England will decide on Thursday whether to raise interest rates in a policy decision that is considered the most elusive to predict in years, with policymakers split over a lack of data to help form an intelligent opinion.
The economy of the United States is the world's largest by nominal gross domestic product (GDP), meaning it has the highest market value of goods and services production output. Despite this fact, the British pound’s nominal value is higher than the US dollar.
The explanation for this is that the nominal value of a country's currency is not necessarily related to its economic strength.
Another example of this can be found in EUR/USD, the world’s heaviest traded currency pair, which has a numerator (EUR) that is nominally higher than the denominator (USD), yet this is not related to the strength of US and European economies.
Interest rates of central banks - US Federal Reserve (Fed) and Bank of England (BoE), the central banks for the US and the UK, make key policy decisions on interest rates and money supply. The banks can affect the value of their currencies through the purchasing and selling of foreign currencies (Forex), as well as by raising or lowering interest rates.
Geopolitical tensions - uncertainty surrounding the political system in the US or the UK can have a strong influence on the exchange rate of GBP/USD. Brexit, the plan for the United Kingdom to exit the European Union, is an example of a political event that had economic implications for British and global economies.
Government reports - for example, the Bureau of Statistics of the US Department of Labor releases its Employment Situation Summary reports and the Office for National Statistics reports on the UK's employment and unemployment-related statistics. High employment figures in the US (and a low unemployment rate) might cause the USD to rise.
Global trade - changes in the exchange of goods and services between the US and the UK, as well as other countries, may influence their currencies’ strength.