Sterling's Slump | tutor2u Economics

Continued uncertainty among investors about the post-Brexit landscape and stronger macroeconomic data from a resurgent Euro Zone appear to be the main factors behind the slump in the external value of sterling.

The Euro has hit an eight-year high against sterling and some currency analysts are forecasting that the pound could reach parity against the Euro later on this year especially if the European Central Bank starts to raise their policy interest rates.

Before the EU referendum £1 could have bought you Euro 1.40 but millions of holiday-makers travelling to continental Europe this summer will have felt the damage to their real spending power.

Imported inflation also increasing as a lower currency lifts the sterling price of imported raw materials, component parts and finished manufactured products.

The best measure of the external value of sterling is the trade weighted exchange rate index. 20% of the index comprises the US dollar - sterling this week fell below $1.28 for first time since June - and 50% of the index comprises the Euro.

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