Author: Dave Mills
The value of the pound in our pockets has far-reaching consequences for our personal finances and day-to-day life, particularly over time… Sterling, as it’s known, is subject to the same fluctuations in value as any other major currency. So what causes rises and falls? And what are the results of these changes? This month we examine these seemingly complex questions by breaking them down into a few straightforward ideas…
The pound is traded freely on the world’s currency markets and can gain or lose value depending on how much confidence currency traders have in the state of the British economy. For example, negative news of high unemployment or political instability can see sterling take a hit. However, good news like major investment from abroad or high economic growth will see it rise in value. Importantly, the pound’s value against the world’s other leading currencies like the US dollar and the Euro provide the most reliable indication of how sterling is performing.
The most recent event to wipe significant value off the pound was the result of the 2016 referendum on Britain’s membership of the European Union. When the British people voted 48%/52% in favour of leaving the EU, investors lost some confidence in the future of the British economy. As a result, the pound slumped to a 30-year low against the US dollar. Against the Euro the pound fared even worse, with some currency exchangers offering near-parity between the two units.
It’s normal to only think about exchange rates when you go on holiday. After all, the price of a hotel or a meal can significantly alter how much we can afford to indulge. But it makes a big difference at home too… One key variable is the price of oil. That’s because oil is a vital commodity that’s traded globally in US dollars. This means if the pound falls against the dollar, you’ll have to pay more to fill up your car. And if you don’t have a car, you’re immune, right? Wrong. The price of oil, naturally, affects all transportation costs, which means you’re likely to see prices increase in the supermarket and on the high street as well. These price rises are likely to be just a few pence, but over time the increases will certainly add up.
A fall in the value of sterling can be helpful to businesses who export products and/or services. Providing there are no trade tariffs involved, buyers may choose to buy a product or service from the UK rather than anywhere else because they can get better value for money due to a weak pound. This can lead to UK manufacturing firms benefiting and taking on more staff to meet demand. However, if your company is reliant on importing items that you then sell to the UK market, you’ll most likely have to pass price increases on to your customers, making your sales proposition harder.
Higher prices due to a weak pound can sometimes cause inflation. We often see inflation [LINK TO LAST MONTH’S BLOG POST] figures affected by petrol prices, for example. The main way of controlling inflation is through rises in interest rates, which make the cost of borrowing more expensive. When borrowing becomes more expensive, businesses are less likely to borrow to invest, which can stall growth in the economy and lead to a downturn. And don’t forget, any downturn will affect the confidence investors have in sterling.
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