Question

What can you infer about the changes in U.K. pound–euro exchange rate during July and August 2014? Can you think of a reason for the behavior of that exchange rate?

If the dollar continues its upward path against the euro, what do you predict will be the consequences for U.S. and European relative inflation rates?

Answer 1

The U.K pound-euro exchange rate during July and August 2014 on a closer look shows a consistent appreciation of U.K's pound - sterling against the euro.

The exchange rate at the end of June 2014 was £1 GBP = €1.2492.

Whereas the exchange rate at the end of July 2014 was £1 GBP = €1.2613.

And at the end of August ( on 31st August, 2014 ) was £1 GBP = €1.2631.

It was during this time that debate for BREXIT started and U.K was seen to be benefiting from the move which led to a rise in its currency due to higher demand for the country's currency, whereas Europe was apparently on losing side with U.K. leaving which led to investors selling the currency of Europe, euro.

If dollar continues to appreciate against euro, the inflation rate in the Europe would be higher and in the U.S. it would be lower as dollar becomes more valuable against euro, one unit of dollar can buy more amount of goods than before.