Sterling and FX
How exchange rates are quoted, what moves the pound and who feels a change
3 min read
The foreign exchange (FX) market is where currencies are swapped for one another. It trades around the clock on weekdays, and London is its largest centre. For UK businesses, the value of sterling changes what they pay for imports, what they earn from exports and what overseas profits are worth in pounds.
Reading a quote
A currency pair is written base/quote. GBP/USD at 1.25 means £1 buys $1.25. If it rises to 1.30, each pound buys more dollars, so sterling has strengthened. If it falls to 1.20, sterling has weakened. Traders call GBP/USD cable, a name that dates back to the telegraph cable across the Atlantic.
Watch which currency comes first. EUR/GBP is quoted with the euro as the base, so a rise in EUR/GBP means the pound has weakened against the euro.
What moves the pound
- Interest rates: higher UK rates relative to other countries make holding pounds more rewarding
- Surprises: markets price in what they expect, so unexpected data or decisions move currencies most
- Growth and inflation: a stronger economy tends to attract investment, while persistent inflation erodes a currency's value
- Confidence in policy: doubts about the public finances or political stability can weaken sterling quickly
- Risk appetite: in a global sell-off, investors often buy the US dollar, the Swiss franc or the Japanese yen
Who feels a weaker pound
| Who | Effect |
|---|---|
| Households | Imported goods, fuel and holidays abroad cost more, which can push inflation up |
| Exporters | Their goods look cheaper to overseas buyers |
| Importers | Their costs rise, squeezing margins unless they raise prices |
| Companies earning abroad | Overseas profits are worth more when converted into pounds |
| Overseas buyers | UK companies and property look cheaper, which can encourage takeovers |
Worked example: overseas earnings in pounds
A UK company earns $50m a year in the US. GBP/USD falls from 1.25 to 1.20.
At 1.25: $50m ÷ 1.25 = £40.0m
At 1.20: $50m ÷ 1.20 ≈ £41.7m
The same dollar earnings are worth about £1.7m, or 4.2%, more in pounds
Hedging
Companies that don't want their profits to swing with exchange rates can hedge. A forward contract fixes today the rate for a future exchange, so an importer knows what its dollar invoices will cost in pounds. Options give the right, but not the obligation, to exchange at a set rate. Advising on and trading these products is a big part of what markets teams do for corporate clients.
How to talk about it
Say which way sterling moved, against which currency and why, then pick one type of business and walk through the effect. A retailer that buys stock in dollars and a company with most of its sales overseas make a good contrast.