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The Top Economic Factors affecting UK Economy and its impact on Currency Prices as of September 2023

The Top Factors

Interest Rates

The Bank of England (BoE) has been raising interest rates in order to combat inflation, which has raised concerns, about its impact on the UK economy. In August 2023 the BoE unexpectedly increased interest rates for the time by 25 basis points to 5.25%. As a result mortgage rates have gone up putting pressure on the housing market and making it less affordable for homebuyers. With mortgage rates there might be a slowdown in the housing market as buyers become more cautious and postpone their purchases.


In June 2023 the UK Consumer Price Index (CPI) inflation rate stood at its level since March 2022 at 7.9% down from 8.7% in May. Inflation plays a role in determining house prices as it affects the cost of goods and services including properties. When inflation rises property prices can also increase, making homes less affordable for buyers. However if inflation leads to increases in mortgage rates potential buyers may struggle to secure loans resulting in reduced demand and lower house prices.


The unemployment rate in the UK has been consistently. Reached 3.9% during the three months leading up to June 2023. Historically speaking when house prices decline it often coincides with an increase, in unemployment rates.

A significant rise, in unemployment could potentially result in people being forced to sell their homes and foreclosures which may lead to a decline in house prices. However for now the current unemployment rate does not indicate any signs suggesting that the housing market might not be greatly impacted by unemployment.

Investment by Businesses

In the quarter of 2023 there was a 3.4% increase in business investment in the UK marking the largest surge since the first quarter of 2022. Increased business investment can have an effect on the housing market as it can create job opportunities and foster economic growth consequently boosting demand for housing. Nevertheless it’s important to acknowledge that the relationship between business investment and the housing market is intricate and can be influenced by factors such as interest rates, inflation levels and unemployment.

Geopolitical Tensions

Tensions like the war in Ukraine have introduced uncertainties into the global economy that could impact both the UK economy and the GBP/USD exchange rate. Geopolitical tensions have the potential to affect investor confidence and cause fluctuations in markets including those tied to housing. While it remains challenging to predict how geopolitical tensions will precisely impact Britains housing market it is vital to consider these factors when evaluating economic conditions and their potential influence, on GBP/USD exchange rates.

House prices have declined due to the rise in interest rates. In months, we have witnessed a drop in house prices as higher interest rates have made mortgages more expensive and reduced people's purchasing power

UK’s Trade Balance

The current status of the UKs trade balance indicates a decrease in its deficit. During the quarter of 2023 the overall trade balance for goods and services (excluding precious metals) narrowed by £0.5 billion resulting in a deficit of £19.0 billion. Imports experienced a decline of £3.0 billion while exports decreased by £2.6 billion. The trade balance of the UK can have an impact on the exchange rate between GBP and USD as it affects the supply and demand for currency. When a countrys trade account does not equal zero there is either a surplus or shortage in supply or demand, for that countrys currency, which subsequently influences its price on the market. In the case of the UK the narrowing trade deficit has the potential to strengthen GBP against USD.

Changes in Interest Rate Factor

The UKs housing market has been significantly impacted by changes in interest rates over the year. Here are some important points to consider;

  1. House prices have declined due to the rise in interest rates. In months we have witnessed a drop in house prices as higher interest rates have made mortgages more expensive and reduced peoples purchasing power.
  2. Affordability has been affected by the increase in mortgage rates. Mortgage rates in Britain have gone up with the rate for a two year mortgage deal across different loan to value ratios reaching 5.82% compared to 5.30% just a month ago.
  3. Analysts are predicting a 10% decrease in house prices. Oxford Economics, a consultancy firm has forecasted that house prices might experience a peak to trough decline of 10% based on the Bank of England raising interest rates to 5%.

4. Higher mortgage rates have made it harder for more people to enter the housing market due to affordability issues. Over the year higher mortgage rates resulted in an average increase of 23% or £216 per month on mortgage repayments making it increasingly challenging for individuals to afford homes.

5.The increase in interest rates has discouraged people from purchasing properties. According to the Bank of England over 1.4 million households in the UK could potentially face interest rates when they renew their fixed rate mortgages in 2023. This situation might discourage people from purchasing properties.

These fluctuations in interest rates throughout the year have resulted in declining house prices rising mortgage rates and decreased affordability for potential homebuyers. These factors have acted as deterrents for individuals considering property purchases. Have contributed to a slowdown in the housing market, within the UK.

How has GBP/USD impacted:

The value of this currency pair is affected by various factors that influence the British pound and the U.S. dollar in relation to each other and other currencies. Some of the key factors affecting the GBP/USD exchange rate include:

  1. Interest Rates: The interest rate differential between the Bank of England (BoE) and the Federal Reserve affects the value of the GBP and USD when compared with each other. Higher interest rates generally lead to increased demand for a currency as investors seek higher returns on their investments.
  2. Inflation: Inflation rates in both the UK and the US can impact the GBP/USD exchange rate. High inflation levels in one country relative to the other can cause the currency value to depreciate.
  3. Economic Indicators: Economic indicators such as GDP growth, unemployment rates, and business investment can influence the GBP/USD exchange rate.
  4. Geopolitical Tensions: Developments in the global economy, such as changes in commodity prices and geopolitical tensions, can impact both currencies and influence their exchange rate.
  5. Central Bank Policies: Actions and statements made by the Bank of England and the Federal Reserve can influence the GBP/USD exchange rate.
  6. Trade Balance: The trade balance between the UK and the US can impact the GBP/USD exchange rate through its effect on foreign exchange supply and demand.
  7. Market Sentiment: Market sentiment, investor perception, and speculative activities in the foreign exchange market can lead to short-term fluctuations in the GBP/USD exchange rate.
  8. Correlation with Other Currency Pairs: The GBP/USD tends to have a negative correlation with the USD/CHF and a positive correlation with the EUR/USD currency pairs
Research Estimates for the Year Ahead

The GBP/USD currency pair is expected to experience fluctuations in the coming months from September to December 2023. Here are some key points from various forecasts:

  1. J.P. Morgan Research forecasted that the GBP/USD will reach 1.20 in March 2023, before falling to 1.18 in June 2023, to 1.16 in September 2023, and to 1.15 in December 2023.
  2. LongForecast predicts the GBP/USD exchange rate to close around 1.285 in December 2023, with a high of 1.304 and a low of 1.262 during the month.
  3. According to market pricing as of September 4, 2023, the Pound/Dollar exchange rate could be at 1.259 in one month and 1.2589 in three months.

*The above table of Forecasts from Reuters

It is important to note that currency forecasts are subject to change due to various factors such as interest rates, inflation, economic indicators, geopolitical tensions, central bank policies, trade balance, market sentiment, and correlation with other currency pairs. These factors can cause fluctuations in the value of the British pound and the U.S. dollar, impacting the GBP/USD exchange rate.

Some of the key factors affecting the GBP/USD exchange rate include interest rates, inflation, economic indicators, and geopolitical tensions

In conclusion, as of September 2023, the UK economy faces a complex interplay of economic factors that have significant implications for both its housing market and the GBP/USD exchange rate. The Bank of England’s decision to raise interest rates to combat inflation has led to challenges in the housing sector, with declining house prices, reduced affordability, and a cautious approach from potential homebuyers. Moreover, inflation, unemployment rates, and business investment further shape the housing market’s dynamics, although their precise impacts remain intricate and subject to multiple variables.

Geopolitical tensions, exemplified by events like the Ukraine conflict, introduce a layer of uncertainty into the global economy, potentially affecting investor confidence and causing fluctuations in various markets, including housing. Additionally, the UK’s trade balance, marked by a narrowing deficit, plays a role in shaping the GBP/USD exchange rate, as it influences the supply and demand for currency.

The fluctuations in interest rates throughout the year have had a profound effect on the housing market, resulting in declining house prices, rising mortgage rates, and decreased affordability, discouraging potential homebuyers and contributing to a slowdown in the UK’s housing sector.

Looking ahead, currency forecasts indicate that the GBP/USD exchange rate is likely to experience further fluctuations in the coming months. These forecasts are contingent on a multitude of factors, including interest rates, inflation, economic indicators, geopolitical tensions, central bank policies, trade balances, market sentiment, and correlations with other currency pairs. Thus, it is imperative to remain vigilant and adaptive in assessing economic conditions and their impacts on both the UK’s housing market and the GBP/USD exchange rate.

Disclaimer: This is not an Investment Advice. Investing and trading in currencies involve inherent risks. It’s essential to conduct thorough research and consider your risk tolerance before engaging in any financial activities.