Why does the falling value of the pound matter?

Read the article and summarise the three main reasons for sterling’s fall in value

Harold Wilson might have claimed that a devaluation of sterling doesn't affect the pound in your pocket, but it certainly affects the way the economy operates and therefore all of us.

There are three broad reasons for the sickly state of the pound, which has been falling since the Brexit vote.

'Flash crash'

First, and fundamentally, it is a market judgement on the future growth potential of the UK economy relative to the future growth potential of competitor economies, and their currencies.

If it is judged that the value of UK assets will grow less quickly in the future - and most economists have downgraded growth next year following the Brexit vote - then investors will discount those assets, sell sterling and buy more favourable currencies such as the dollar.

Second, this downward trajectory is then emphasised by near-term market makers who "short" the currency, making a profit margin on the pound's decline.

Mix that with millions of electronic trading programmes which automatically follow sell or buy trades and toxic and destabilising events such as the "flash crash" of  Friday  7 October are the result.

Everyone becomes a little more nervous and the market for sterling becomes a little more sickly.

Particularly as the government prepares for a "hard" Brexit - where the UK leaves the European Union single market - which many investors believe will be a poor outcome for the economy.

Third, differential (differences in) interest rate expectations drive currency moves.

In Britain, the Bank of England has made it clear it expects to engage in more monetary loosening before the end of the year.

That could mean an interest rate cut to 0.1% next month,

At the same time, the Federal Reserve, America's central bank, is signalling a rate rise.

Interest rate rises usually strengthen currencies - so the dollar becomes a better buy than sterling.