Puny Pound: The pound hits its lowest value since 2016
August 15, 2019
2 min read
What's going on here?
The pound fell against major world currencies on the 6th August following ‘no deal’ and recession fears.
What does this mean?
The value of the pound depends on the demand for the currency; the less investors/businesses want to buy it, the lower its value drops. The Bank of England’s effective exchange rate, published every day and compares the sterling to other currencies, sank to the lowest rate since the financial crash, barring the 2016 ‘flash crash’. The pound tumbled near to $1.20 and 1.088 euros. There are fears it could reach parity with the euro and the dollar. The pound is less popular after heightened fears of a ‘no deal’ Brexit that the government is preparing for. A fall in GDP and fear of interest rate decline have also lessened investors’ confidence in sterling.
What's the big picture effect?
The effect of a fall in the pound is exports become cheaper, helping British companies exporting overseas to stay competitive. It also gives the UK tourism industry a boost. However, many UK exporters often import raw materials etc. which will push their costs up. Uncertainty over trade relationships due to Brexit may also negatively affect businesses. For law firms this may mean fewer transactional deals. Though, foreign companies may be more willing to acquire UK businesses as their assets will be cheaper. This may increase M&A work for firms.
It is likely the Bank of England will lower interest rates later this year to help the economy. This means investors will get less return for their money, they are hence unlikely to invest in the UK. Although, this makes it easier for businesses to borrow money to expand. Further, the 0.2% fall in GDP has raised fears of a recession– defined as a fall in GDP for two quarters. This is due to a slope in economic activity in the 2nd quarter of 2019 after the Brexit stockpiling rush of the first.
The pound is set to fall further if a no deal becomes a reality, but could recover quickly if a deal is sought. A general election could also bring more certainty and raise the pound. But no deal fears will only be quelled if a deal is reached, given the EU is unlikely to negotiate, uncertainty is dominating for now.
Report written by Elizabeth Marshall
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