At the end of June, the pound surged to a near four-year high against the dollar.

Sterling’s appreciation to $1.37 reflects a weakening dollar driven by investor anxiety over potential threats to the Federal Reserve’s independence. Markets reacted to reports that President Trump may soon replace Jerome Powell with a more compliant successor, raising concerns over politicised monetary policy. If the Fed’s credibility is undermined, inflation expectations could rise, prompting higher long-term interest rates. In contrast, UK monetary policy appears comparatively stable, boosting confidence in sterling. The pound’s strength may reduce imported inflation but risks making UK exports less competitive, potentially widening the current account deficit.

Pound touches near 4-year high as Trump rattles dollar - BBC News

1. Explain what a ‘bilateral exchange rate’ is. What is the main reason for Sterling’s appreciation according to the article?

2. Discuss the potential benefits and costs to the UK economy of a stronger £.

3. Discuss the importance of central bank credibility and independence for successful inflation control.