Exchange rates and their likely effect on UK businesses
Last September, the Pound reached 1.56 against the Dollar and the Euro was trading at over 1.40 versus GBP. How things have changed. Post-Brexit we have seen the Pound collapse. With what seems to be unrelenting uncertainty and a base rate at 0.25% (likely heading for negative territory), we will probably see even further weakness in Sterling, especially versus the Dollar.
Now let’s look at GPB versus EUR. The EU is facing economic woes, political uncertainty, the migration debate, unemployment, and problems are on the horizon for its banks. This sort of arsenal is likely to offset some of the negativity regarding the uncertainty in the British economy. The net result could prove the currency pair to be somewhat less volatile than that of GBP versus the Dollar. This said, we do get the feeling that we’re back where we started with GBP-EUR.
The US, although not without its problems, is in better health than Europe. The world buys the Dollar in times of uncertainty, so going forward it is likely that we will see some further adverse movements in the Pound versus the Dollar. Any reversal in the present trend is unlikely, at least for the foreseeable!
However, it’s far from all bad news because as GBP depreciates it makes exports cheaper. Think of it this way: Pound goes down and it’s cheaper to export, but up goes the price of imports. Of course, not all business outside the Euro area is traded in USD, but a lot is.
There are of course other variables that make this simple analogy a little more complex like the price of fuel and the price of imported components that make up part of the manufactured export product.
The following examples demonstrates the effects of this volatility.
How the Pound’s fluctuation impacts the manufacturer:
Let’s suppose last September a car costs £4,000.00 to manufacture in the UK.
Last September with the Euro at 1.40 it would have cost €5,600.00
At the present rate of 1.18 the equivalent cost of that car is €4,720.00
This represents a 17% depreciation for the European buyer.
The same example in Dollars:
Last September the cost of a £4,000.00 UK manufactured car at 1.5600 would come to $6,240.00
The current equivalent cost at 1.2900 works out at $5,160.00
This represents a 19% discount for the foreign buyer.
It’s quite clear from the examples above that currency fluctuations in the range we are witnessing at the moment play a huge part not only in a company’s profitability, but in the UK economy as a whole. UK businesses can whether the storm, but would be wise to have a robust FX strategy in place.
HSBC ANALYST David Bloom and his team believe the Bank of England is likely to cut the base rate to 0.10% in November, pushing the pound to parity with the Euro and the pound will fall to 1.10 against the Dollar.
Sterling hasn’t seen parity with the Dollar since the 2008 financial crisis.