Currency markets are basically the basis for UK companies trading abroad, and foreign companies trading in the UK. These rates can have a major impact on local currency denominated profits when UK companies convert back to sterling and overseas companies convert back their own currency.
While the majority of figures which are announced in the UK press refer to the UK economy, overseas inward and outward investment is vital to the success of the domestic UK economy. It is therefore vital the currency rates are supported in order to arrive at the “correct” optimum level. The level which allows UK companies to be competitive overseas, and also encourages foreign investment into the UK.
Just like the money markets, the currency markets are also very sensitive to actual and potential changes in UK base rates, and currency rates are often prone to movement ahead of changes - offering another useful indication.
To the naked eye it may seem that interest rate changes are decided at each monthly meeting, when in fact they have probably been materialising for months, only requiring final confirmation. The transparency of economic data now a days has allowed a number of market observers to develop an understanding of the signs associated with interest rate changes.
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