Table of contents
In 2020, the world was thrown into disarray by the coronavirus pandemic. Economies were steam-rolled by the effects of enforced lockdowns, completely preventing some businesses from operating, particularly those in the retail, tourism and hospitality sectors. At the time of writing, however, the situation is very different. For the majority of countries, lockdowns and restrictions have been lifted, the virus’ transmission rates have fallen and mortalities have dropped considerably. In 2021, the United Kingdom in particular, began to learn to live with the virus and this, in turn, enabled the nation’s economy to start to recover.
If you’re considering investing in the foreign exchange (forex) market, then you’ll first need to understand what is forex trading and what are the key factors that can drive market prices. You’ll want to keep track of the health of the world’s major economies, as this is a primary factor that affects the value of currency pairs. Since the UK’s economy has experienced a surge in momentum recently, we will take a look at what impact this has had both on the country itself and upon the forex market.
The growth of the UK economy
Gross domestic product (GDP) is one of the most informative economic indicators when it comes to determining the health of a country’s economy. This measures the total value of a nation’s goods and services within a specific time frame and in 2021, the UK’s GDP increased by a staggering 7.5%. When compared to other major nations recovering from the effects of the pandemic, the UK’s rebound beats the US, France, Germany and Italy. This is the most dramatic economic expansion that the country has experienced since records first began in 1948.
The UK economy’s resilience was spurred by a government support package of £400 billion and the effective vaccination rollout scheme that enabled lockdowns to be lifted and weakened sectors to begin to function normally. The UK government has pledged to continue to support the country’s economic plight by focussing on employment schemes, supporting households with high living costs, and by providing funding for businesses.
Inflation and interest rates
In the midst of the positivity that surrounded the UK’s economic growth were increased inflation levels, which began to spiral out of control, seeing prices soar. The economic rebound that the nation experienced in 2021 was underpinned by increased consumer spending, which accounted for 80% of the UK’s growth. Consumer spending has been hit hard by inflation, since individuals are now tackling with extremely high living costs and increased interest rates — making it more expensive to borrow money.
When there is increased demand for a product or service, inflation rates can rise. The UK experienced its highest inflation rates in 30 years, rising to 5.4% in the last 12 months. The country aims to keep its inflation rate at 2% and therefore, these increased interest rates were introduced by the Bank of England, to help to curb inflation. As previously mentioned, when interest rates are increased, the consumer is prompted to save their capital, since it is more costly to borrow from the bank.
What effect has this had on forex?
The economic recovery of the UK following the coronavirus pandemic has been a significant contributor to the increased inflation rates that the country is experiencing at the time of writing. This is because, when the economy reopened, demand for goods and services increased and prices soared in response. These high inflation levels and increased interest rates have directly impacted the forex market because higher interest rates attract investment from foreign nations, subsequently boosting the demand for their currency.
When trading in the forex market, it is vital that you keep up to date with any economic updates that are released in the news or data releases.
These informative data releases take place periodically and are plotted in an economic calendar. By employing this resource, you can keep track of the upcoming events that could impact your position in the forex market, so that you can plan ahead and make effective decisions when volatility levels change.