Explain what could cause the pound sterling to appreciate.

An appreciation causes a currency to become worth more against other currencies. Using a whiteboard - draw a diagram of a supply/demand exchange rate curves, showing that demand needs to increase and/or supply needs to decrease in order to cause an appreciation of a currency.Factors that cause an appreciation:Increase in interest rate - lower interest rates (better rate of return on savings) mean it is more appealing for people to save in the UK, and therefore an inflow of money from abroad would occur (hot money). This increase in demand would lead to an appreciation.Lower inflation - UK goods more competitive as they will be comparatively cheaper - demand for UK goods means a demand for UK currency.Increased competitiveness of UK goods - increase in demand for pound sterlingBuying domestic currency - If the UK sold dollars and bought pound sterling, then this would cause an appreciation of pound sterling.Surplus on current account - Inflow of foreign exchange, a large current account deficit will cause an appreciation.Expectations /forecasts - If investors expect the pound sterling to appreciate in the future, they will buy it which will in turn cause the increase in demand/decrease in supply that will cause this to actually occur.These factors increase demand, which also reduces supply and causes the pound to appreciate.