a) The yield (interest rate) on UK ten-year government gilts (click chart for up to date version),
b) GBP (£ pound sterling) against a basket of the main currencies.
There seems to be quite a strong correlation, doesn't there?
The simple explanation for this is that people want to invest in currencies where they can earn more interest, so when our interest rate goes up, investors and speculators pile in, and when it falls, they all abandon ship.
It is relative interest rates which matter, i.e. if interest rates around the world are 5% and a country drops it interest rate to 1%, then people will take their money out of that country/currency.
But interest rates move pretty much in tandem all over the world. Since the "financial crisis" most central banks have been paying less then 1% interest on short term stuff. And if interest rates around the world were 5% and they all dropped their interest rates to 1%, then this has no particular impact on currency flows or currency levels. Why does it have such a strong impact on GBP?
