In the continuing fallout from the recent EU referendum and the resulting impending Brexit the value of the pound has fallen sharply, sinking below the $1.30 mark for the first time since 1985.
The pound had previously been weakening in the run-up to the referendum vote as investors worried about the UK’s economic prospects were the country to leave the EU, but following the vote – and despite the Bank of England’s efforts – the fall has been dramatic.
Forecasters in the City anticipate that the currency will drop further before the end of 2016 and none of the major banks expect any real rebound until 2017.
A weak pound means that foreign goods and holidays will become more expensive while British exports will become cheaper. There are likely to be some who will benefit from the weak pound but just as likely there will be those who will lose out.
Firms selling their goods abroad could benefit from the UK’s current economic climate, as UK exporters can sell their goods at a cheaper rate than before which could lead to more sales.
If Europe and the rest of the world end up buying more UK exports some believe that this could offset the lower economic growth expected in the UK. This, though, all depends on the level of demand for British exports.
Who loses out?
As the pound weakens the price of imported goods will go up, meaning that the average Brit will doubtless be paying more for their petrol, food and electronic items. Travelling abroad will cost more as the weakened pound will buy people less foreign currency.
Firms that buy raw materials from abroad will be impacted too, paying more to import the materials they require, and foreign workers may not find the UK as attractive as they have in the past.
One of the questions on the minds of a lot of people is whether or not the fall in the value of the pound will be temporary or sustained; if temporary the price fluctuations won’t last long but if it proves to be sustained the UK’s buying power abroad will suffer in the long term.
Furthermore, as the currency markets focus on near-term rather than long-term risks, just because the pound is weak now does not mean it will be forever.
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Jul 19, 2016.