The Falling Value Of The Pound: What It Means For Us

18/08/2016 08:56

Uncertainty. The one theme the human race doesn't like. What's going to happen? How will it affect me? What does this mean for the future? These few frequently asked questions are inevitably thought of when there is uncertainty. How do you answer these questions if you are unsure what is actually going to be the result? For example, you may be awaiting results of an exam you have taken and are unsure what the result will be. Well, you'll just have to wait! The uncertainty you have will affect you personally and can even give you sleepless nights. However, economic uncertainty is in a league of its own. Economic uncertainty simply means that what happens as a result to the economy is difficult to predict- whether that be inflation, currency value or shares.

In order to understand what the impacts of the low value of the pound are, it is important to understand how we got in this situation. There was a lot of economic uncertainty in the run-up to the referendum and this had caused fluctuations on the value of currency. Leaving the European Union would cause the value to drop because the situation would be volatile- likely to have sudden impacts and change because the European Union is a major player in significantly boosting the economy through trade, jobs and funding. The early hours of 24th June 2016 revealed a result which would give top economists nightmares. The United Kingdom had voted to leave the European Union. Whilst many people were sleeping at the time, the economic situation was very awake. At 1:00 am, the Great British Pound (GBP) was trading against the United States Dollar (USD) at a rate of £1-$1.4904 after the optimistic YouGov poll suggesting Britain had opted to stay in the European Union and a few early results had come in- which were giving some positive indications. However, this was short-lived because when the mainstream results were declared, it was clear the United Kingdom was heading towards Brexit and this saw the value of the pound fall. Over the next couple of weeks, after the referendum, the Great British Pound was exchanging with the United States Dollar at a rate of £1-$1.28. This rate is in the region of what it is today so it is clear the economic situation hasn't improved.

What are the positives of the value of the pound being low?

Firstly, exports will become cheaper. This is because the value of the pound being low means British companies would be charged lower prices than before to export in contrast to importing goods. This would also mean that people living in the United Kingdom would want to buy British goods instead of foreign ones because they would simply be cheaper and more affordable instead of imported goods, which would have a higher price. Consequently, this would help businesses gain more revenue and have an increased profit, which can be distributed to employees as a pay rise or to improve infrastructure.

The stock market has seen a rise as the FTSE 100 is currently at a 14 month high. This is due to the fact that exporters and businessmen are aware of the prices for exports being cheaper and therefore see a business strategy of selling their goods overseas. As a result, businesses can increase their profit margins and this may help large Public Limited Companies in the FTSE 100 and FTSE 250, who sometimes rely on overseas investment, to rise due to increase in business. The stock market could upsurge further like it has done recently and hit the 7000 mark.

What are the negatives of the value of pound being low?

The prices of products may increase due to the cost of importation being higher than usual. This is because businesses would only be getting the best value for money if the pound was worth considerably more as they could subsequently buy more. However, due to the pound being worth less, they can buy less with the certain amount. This means that UK businesses will have to increase prices of their goods to ensure they have decent profit margins. So, inflation rises. Inflation is the term given to an increase in prices of goods in correlation to the falling value of money. In July, inflation rose to 0.6%, which means that the average price of products has increased slightly. However, in the long term inflation is expected to rise further as the pound recovers slowly.

Interests rates has also been an uncertainty factor which has resulted in the plunge of the pound. Once the Governor of the Bank of England announced that the interest rate will be cut from 0.5% to 0.25%, the currency value depreciated by 1.6 percent against USD. Low interest rates mean that things like savings accounts would have less money being added as interest as a result of the cut. This has also affected the price of gold. The slashed interest rates mean investors will want to invest elsewhere instead of keeping the money still in a bank account offering low interest. Gold prices rise as a result of demand but can be deemed as being unaffordable because the value of the pound is weak.

The most obvious negative impact is the exchange rate because the Great British Pound would exchange for less of international currency. If less money is being given in return for the pound, you may have to buy more of that currency than usual. Basically, going on holiday to the beaches of Spain or sightseeing in New York will become expensive.

As the ambiguity continues, the short and long term effects are yet to be seen clearly and what sale they are at, so overall it is early to come to a conclusion. Nevertheless, the recovery of the pound will take some time and will come at a price.