The pair between the British pound and Euro
The pair between the British pound and Euro represents a relationship between the two largest economies in Europe, the United Kingdom, and the Eurozone. The duo has economic interdependence and closeness between the two; therefore, it is less volatile than other pound and Euro. Inflation rate and the interest rate has various effects on the currency.
Discussion
A relatively high inflation rate in the United Kingdom reduces the value of the British pound. The high inflation in the United Kingdom causes an increase in the price of goods in the UK than in European products. Moreover, the UK commodities are less competitive, lowering the demand for export goods and hence less need for the British pound. The rate of buying the Euro increases, therefore, increase in supply for British pounds, thus decrease in the value of the British pound. The inflation in Britain pound depreciates its value against the Euro pound. In the long run, variation in relative inflation rates causes a change in the foreign exchange rates (Subbarao & KR, 2017). Therefore appreciation in the exchange rate reduces inflation while depreciation in exchange rate increases inflation.
The change in interest rates affects the British pound and Euro currency trade. The increase in interest rate increases the currency value and vice versa investment (Alvarez et al., 2019). If Britain banks pay higher interest rates than Eurozone banks, the investors move their funds; therefore, Britain would take advantage of the higher interest rate. The investors would demand more pounds compared to the Euro. Increased interest rate raises the demand and value for the British pound hence lowering the exchange rate for Euro. However, lower interest rate decreases the value and demand of British pound and cause the increase in value for Euro value; this would scare away foreign investors hence destabilizing the Britain economy.
Conclusion
A relatively high inflation rate of British pound currency causes depreciation of the currency and appreciation of the Euro. In contrast, the increase in the interest rate causes an appreciation of the currency and vice versa.