Hook£1.03 to the dollar, briefly
On 26 September 2022, sterling fell to $1.03 — a 37-year low. The trigger was the Truss mini-budget two days earlier; the deeper cause was a loss of confidence in UK fiscal management, compounded by the BoE being seen as behind the curve on inflation. Within 48 hours, imports — priced in dollars for energy and many commodities — were around 11% more expensive in pound terms. The cost-push inflation the BoE was already fighting got an extra kick from the currency it was supposed to be defending.
This is the central FX point: a single shock — fiscal, monetary, geopolitical — propagates through the exchange rate and back into domestic inflation, growth, employment. Currencies are not separate from the macro story. They're the joint where the story bends.
ModelWhat moves a floating rate
A floating exchange rate is the price of one currency in another, set by demand and supply in the FX market. Demand for sterling comes from foreigners buying UK exports, foreigners investing in UK assets (FDI, gilts), and speculators buying ahead of expected appreciation. Supply of sterling comes from UK residents doing the reverse. Interest rate differentials, growth differentials, and credibility shocks all move both sides.
Marshall-Lerner condition: a currency depreciation improves the current account only if the sum of export and import price elasticities exceeds 1. J-curve: even when ML holds, the current account worsens in the short run (volume responses lag, prices respond first) before improving — hence the J shape.
ExamWhat examiners want
Always link the FX move to its trigger AND its consequence. "Sterling fell because of the mini-budget" is half an answer; "Sterling fell because of the mini-budget, which raised import inflation and forced the BoE to hike further than it would have" is a full one.
And give the marker a number. Sterling/dollar pre-mini-budget ≈ $1.14; trough ≈ $1.03; recovery to ≈ $1.20 by mid-2023. Quote it.