Firstly, I will be looking at the determinants of exchange rate in order to find out the factors affecting the exchange rate of a currency such as pound sterling against another. In this way, I will be able to figure out if UK’s currency, pound sterling, is overvalued or not. Secondly, the history of both British exchange rate and economy will be analysed and looked at to see whether Britain has actually suffered from the overvalued exchange rate for the last two decades. I am planning to begin this coursework by defining exchange rate and explaining its effect on the economy. This includes the impact of the exchange rate on balance of payment, interest rate and economic growth, as well as other economic variables and vice versa. Moreover, the reasons for the fluctuations on the pound exchange rate against other currency will be verified and discussed as an example to see the connection between economic variables and exchange rate. In addition, it will be vital to clarify on the basis of what we consider a currency to be overvalued. For example, a tourist might think British pound is overvalued whereas people from Britain might think foreign currencies are undervalued, therefore it is important to understand how we define overvalued exchange rate.